—–A business owner makes 10
—–A business owner makes 1000 items a day. Each day shespends 8 hours producing those items. If hired, elsewhere she couldhave earned $250 an hour. The item sells for $15 each. Productionoccurs seven days a week. If the explicit costs total $150,000 permonth, what is her economic profit? a. ?$240,000 b. ?$60,000 c.?$300,000 d. ?$450,000———————————————————————————————-
Answer:
Economic profit = Total revenue – ( Explicit cost + Implicitcost)
- Implicit costs are the opportunity costs, or next bestalternative. In other words, it is the cost which we have tosacrifice in order to do some other thing. For example – in thisquestion, the business owner sacrifice a job where she can earn$250 per hour. In this question she work for 8 hours so if shedecide to choose the job she could earn $250 * 8 = $2000 per dayand she can earn $2000 * 30 =$60000 in a month which she have tosacrifice for her own business. So implicit cost is $60000.
- Explicit cost are the direct payments made to the others or thecash outflow. Here it is given that explicit cost is $150000 permonth.
- Total revenue = price * quantity of output, in this questionthe item sells for $15 I.e., price = $15 and quantity of output is1000 items a day means in a month 1000*30 = 30000 units ofoutput.
Total revenue (TR) = price * quantity of output
TR = 15 * 30000
TR = 450000
Now we have all the values so we put these values of implicitcost, explicit cost and total revenue in the economic profit
Economic profit = TR – ( implicit cost + explicit cost)
Economic profit = $450000 – ( $60000 + $150000)
Economic profit = $ 240,000.
So correct ans is a) 240,000.
Option b) is incorrect because $60,000 is implicit cost noteconomic profit.
Option c) is also incorrect because the value of the economicprofit is $240000 not $300000
Option d) is also incorrect because $450000 is the total revenuenot the economic profit.
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