Question

In 2013, Roma was a schoolteacher and earned $40.000. But she enjoys creating cartoons, so at the beginning of 2014, Roma quit teaching and set to work as a cartoonist. She stopped renting out her basement for 55,000 a year and began to use it as her office. She used 55,000 from her savings account to buy a new computer, and she leased a printer for $150 a year. During 2010, Roma paid $1,250 for paper, utilities, and postage: the bank paid 5 percenta year on savings account balances and Roma sold $50,000 of cartoons. Normal profit is $3,000 a year. At the end of 2014, Roma was offered $4,000 for her computer. For 2014, calculate Roma's: 1a. Explicit costs. 1b. Implicit costs. 1c. Economic profit.

Answer 1

Answer:

a. $56,400

b. 101,750

c. Economic loss of $108,150

Explanation:

a.

Explicit Cost

The direct payments made to other for different purposes s explicit cost. Such as wages, rent etc.

For Roma Explicit costs are

Computer                                $55,000

Printer lease payment            $150

Paper, utilities, & postage      $1,250  

Total Explicit Cost                   $56,400

b.

Implicit Cost

Any opportunity cost is the implicit cost. The loss of benefit which someone faces for choosing an alternative.

For Roma Explicit costs are

School Teacher Salary       $40.000.

Building rent                       $55,000  

Bank Interest (5% 55,000) $2,750

Computer offer                   $4,000

Total Implicit cost               $101750

c.

Economic Profit

Economic Profit is the net of Revenue / Income less Implicit and Explicit costs associated with the revenue / Income.

Economic Profit / loss = Total Revenues - (Explicit Costs + Implicit Costs)

Economic Profit / loss = $50,000 - ($56,400 + 101,750)

Economic Loss = $108,150