E202Solutions6.1 - Problem Set Six Solutions Chapter 8 3....

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Problem Set Six Solutions Chapter 8 3. John Jones owns and manages a café whose monthly revenue is $5,000. Monthly expenses are: Labor $2,000 Food and drink 500 Electricity 100 Vehicle lease 150 Rent 500 Interest on loan for equipment 1,000 a. Calculate John’s monthly accounting profit. Answer : John's accounting profit is his revenue minus his explicit costs, $5,000 - $4,250 - $750. b. John could earn $1,000 a month elsewhere. However, he prefers to run the café. In fact, he would be willing to pay up to $275 per month to run the café rather than do anything else. Is the café making an economic profit? Should John stay in the café business? Explain. Answer : Yes, his opportunity cost of his labor to run the café is $1,000 - $275, or $725. Adding this implicit cost to the explicit costs implies that the café is making an economic profit of $25. Since economic profit is positive $25 > 0, John should stay in business. c. Suppose the cafe’s revenues and expenses stay the same, but John can now earn $1,100 a
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This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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