Question

In 2011, Britney taught music and earned $20,000. She also earned $4,000 by renting out her basement. On January 1, 2012, she quit teaching, stopped renting out her basement, and began to use it as the office for her new website design business. During 2012, she paid $1,500 for the lease of a Web server and $1,750 for high-speed Internet service. She received a total revenue from Web site designing of $45,000. Normal profit (usual return of such an entrepreneur) is $25,000 a year. Calculate Britney's explicit costs, implicit costs, opportunity cost and economic profit in 2012. Did Britney operate her business at a profit or loss in 2012 (from economic viewpoint)? Explain.

Answer 1

Answer:

Explicit Costs: 1500+1750 = 3250.

Explicit Cost is the cost that is tangible and can be seen.

Implicit Costs & Opportunity Costs: 20000+4000 = 24000.

Implicit cost and opportunity cost will be the same here because they both represent the intangible cost that is foregone by choosing the next best alternative.

Economic Profit: Revenue - Explicit Costs - Implicit Costs

Therefore, the economic profit in this question will be,

45000-3250-24000 = $17480.

Although Britney is earning a profit of $17480 in 2012, from economic viewpoint, she is operating at loss because she could have earned $24000(Rent+Music) by just doing what she was doing previously.

Hope my answer helps you. Good luck.