Chapter 52, Problem 2CYU

a)

To determine

Economic profit

Explanation of Solution

  $\begin{array}{l}\text{Implicit cost:}\hfill \\ =\$2,000+\$23,000\hfill \\ =\$25,000\hfill \\ \hfill \\ \text{And, account profit:}\hfill \\ \text{ = Total Revenue}-\text{Explicit Cost}-\text{Depreciation}\hfill \\ =\$25,000\hfill \\ \hfill \\ \text{Economic profit:}\hfill \\ \text{ = Total revenue}-\text{Explicit cost}-\text{Depreciation}-\text{Implicit cost}\hfill \\ \text{= Accounting profit}-\text{Implicit cost}\hfill \\ =\$25,000-\$25,000\hfill \\ =0\hfill \end{array}$

Therefore, economic profit is zero.

Economics Concept Introduction

Introduction: Economic profit refers to the difference between the revenue which is received from the sale and the costs of inputs including opportunity costs.

b)

To determine

The advisability for devoting time and capital to normal business.

Explanation of Solution

As the economic profit of zero is considered a normal profit and if a person devotes resources to this business with normal profit, then he/she is not going to earn more in any next best activity. Therefore, this profit is only okay to keep a person in the business with just normal profit without any loss.

Economics Concept Introduction

Introduction: Economic profit refers to the difference between the revenue which is received from the sale and the costs of inputs including opportunity costs.