Case/Fair Microeconomics Solutions
Total revenue is $50,000 ($10
5,000). The opportunity cost of the capital is 10% of $100,000
annually or $10,000. Total cost, including opportunity costs, is $45,000 for labor plus $10,000 for
capital or $55,000. Profit is TR-TC or $50,000 – $55,000 = –$5,000. The firm is suffering a
$5,000 loss in economic terms.
They are not earning economic profits; they are not considering opportunity costs. The opportunity
cost of capital is 10 percent of $50,000 annually, or $5,000. Because simple revenue minus cost
yields an accounting profit of only $2,000, adding $5,000 in opportunity cost means the firm is
suffering losses of at least $3,000. In addition, they are not considering the opportunity cost of their
The size of the theater is the fixed factor. Decisions include how to divide up the tickets, what price
to charge, what shows to put on, and what kind of stage sets to use. All are constrained by the scale
of the theater. In the long run you might be able to raise money and build or acquire a bigger
theater. There is no fixed factor in the long run; you can think big!