Jessica is a young doctor who has just started her own practice. Her previous po

Question

Jessica is a young doctor who has just started her own practice. Her previous position paid her $80,000 a year. For office space, she uses a building which she owns and which she has rented in the past for $40,000 a year. Her total revenue from her new practice is $250,000. She pays $50,000 to other firms for materials and supplies, and she pays $40,000 in wages to her office nurse. Assume that Jessica's building and
equipment do not depreciate and that her normal profit is $20,000.

a) What is the opportunity cost of all factors of production employed by Jessica?
b) What is Jessica's economic profit

Explanation / Answer

Opportunity cost is 80,000 (her salary at her former job) and 40,000 (the former rent on her building). Total 120,000. Economic profit is 20,000- 120,000= 100,000 loss.

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