Question

Billy Bob runs a seafood restaurant. Last year he earned $50,000 in revenue. He had explicit costs of $20,000. Billy Bob could have made $30,000 working for the county and could have received an additional $20,000 if he rented out his building and equipment. Calculate Billy Bob's economic profit.

Answer 1

Answer:

-$20,000

Explanation:

Economic profit takes into account opportunity cost of an activity.

Opportunity cost is the next best option forgone when one alternative is chosen over other alternatives. Opportunity cost is also known as implicit cost.

Because Bobby chose to work at the seafood resutrant, he forgoed the opportunity of working at the county. Thus, his opportunity cost is $30,000.

Also, if he wasn't making use of the restaurant, he could have rented it out. Thus, his opportunity cost of making use of the restaurant is $20,000.

Economic profit = Revenue - (Implicit cost + Explicit cost)

$50,000 - ($20,000 + $30,000 + $20,000) = -$20,000

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