Answer:
a) Calculate the implicit costs
Implicit costs are the opportunity costs, the earnings that John forgone for running his business. These are:
His $35,000 annual salary as an engineer.
His $60,000 savings earning a 7% interest rate, for a total annual return of $64,200,
So his total implicit costs are 35,000 + 64,200 = $99,200
b) Calculate the explicit costs.
The explicit costs are the things John has to actually pay money for while running his business: 20,000 for his worker + 15,000 for rent, and 10,000 for utilities = 45,000 in total.
c) Calculate the total cost.
Total costs = implicit costs + explicit costs
Total costs = 99,200 + 45,000
Total costs = 144,200
d) Calculate his profit/loss.
His accounting profit is the revenue he obtains from his business minus his explicit costs:
accounting profit = 210,000 - 45,000 = 165,000 profit
His economic profit is the revenue minus his total costs
economic profit = 210,000 - 144,200 = 65,800 profit
e) Should he continue to the business or go back to his job?
He should continue running his business because he is earning both an economic profit and an accounting profit compared with what he was earning as an engineer + his savings.
