Suppose Jan and Tina decide to start a small business selling turquoise belts in

Question

Suppose Jan and Tina decide to start a small business selling turquoise belts in Miami International Airport. To get into the business they need to invest in a fancy push cart. The price of the push cart is $20,000 with all the display attachments built in. Suppose that Jan and Tina estimate that they will sell 3,000 belts each year for $10 each. Further assume that each belt costs $5 from the supplier. Finally, the cart must be staffed by one clerk, who works for an annual wage of $14,000. Alternatively, Jan and Tina could realize a 10% return if they invest in corporate bonds as against a push cart.

a. Calculate the total opportunity cost.
b. Calculate the accounting profits.
c. Calculate the economic profits.

Explanation / Answer

A. The opportunity cost is what they forgo by commiting to this new venture. In this case, they forgo a 10% return on their money which is 20000*0.10=2000 for an opportunity cost B. the accounting profit is everything explict. TR-TC 20000+3000*(10-5)-14000=20000+15000-14000=21000 C. Economic profit include implicit costs. This is accounting profit - opportunity cost 21000-2000=19000 Hope this helps

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