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Tute10 - answer - ECF1100 MICROECONOMICS Answers to...

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ECF1100: MICROECONOMICS Answers to tutorial 10 Chapter 9, Problem 3 a. John’s accounting profit is his revenue ($50,000) minus his explicit costs ($42,050), or $7950 per year. b. Yes, John should stay in business. The opportunity cost of his labour to run the café is $10,000 – $2,750, or $7,250 per year. Adding this implicit cost to the explicit costs implies that the café is making an economic profit of $700 per year. So John should stay in the business. c. John’s opportunity cost rises by $1,000, to $8,250 per year. The café is now making an economic loss of $300 per year. d. The accounting profit would now be $17,950 per year. The answer to part b would not change. If John had $100,000 of his own to invest in the café, he would forego $10,000 per year in interest by not putting the money in a savings account (assuming the savings account earns him 10% interest). That amount is an opportunity cost that must be included when calculating economic profit. e. To earn a normal profit, the café would have to cover all its implicit and explicit costs. The opportunity cost of John’s time is now $10,000 year, whereas the café’s
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