3. Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,0

Question

3. Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, depreciation, etc.
(a) Complete the following questions: (1) What are Jane’s total revenues? (2) What are Jane’s explicit costs? (3) What is her accounting profit?
(b) List two important implicit costs that Jane has not included.
(c) What is Jane’s pure economic profit (loss)?

Explanation / Answer

Revenues are 1000* 400= 400,000 Explicit costs are 1000*280= 280,000 Accounting profit is 400,000-280,000= 120,000 Implicit costs are 50,000 for Jane's IBM salary and 5,000 interest forgone on the bonds. Pure economic profit is 120,000- 50,000-5,000= 65,000.

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