Florence is considering going into business for herself and has developed the fo
ID: 2495183 • Letter: F
Question
Florence is considering going into business for herself and has developed the following estimates of monthly costs and revenues to aid her in her decision making process. She has decided to house the business in a building that she already owns, although she could rent the building to someone else for $1,000 per month. Estimated payments for utilities are $475 per month. She will hire one employee at a total of $1,100 per month. Inventory is estimated to cost $2,800 per month. Finally, Florence earns $3,000 a month in her current job.
a) how much monthly revenue would Florence have to take in the earn zero economic profit?
b) assume that Florence has estimated her monthly revenue to be $9,000. In this case, Florence would earn an accounting profit(loss) of____, and an economic profit (loss) of___.
c) assume instead that Florence does not own a building and that she will have to rent a buliding for $1,000 per month(all other estimates remain the same). In this case (assuming estimated monthly revenue is still $9,000), Florence would earn an accounting profit (loss) of ____ and an economic profit loss of___.
Explanation / Answer
Implicit cost = Florence Salary ( 3000) + Opportunity cost of building (1000 ) = > 4000
Explicit Costs = Payments for utilities are $475 per month. She will hire one employee at a total of $1,100 per month. Inventory is estimated to cost $2,800 per month.
475+ 1100+ 2800 = 4375
Zero economic profit => TR - TC = 0 i.e., TR = TC
TC = 4375 + 4000 = 8375
a) Monthly Revenue should be 8375 for 0 economic profit.
b) If monthly revenue is $9,000
Economic Profit = 9000 - 8375 =>625
Accounting Profit = TR - Total explicit Cost => 9000 - 4375 = 4625
c) TR = 9000
And rent has shifted from implicit to explicit cost.
New explicit cost = 4375 + 1000 = 5375
Economic Profit will remain same = 625
Accounting profit = 9000 - 5375 = 3625
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