Question

Suppose a family-owned donut shop has $80,000 in total revenues, $36,000 in rent, and $20,000 in additional operating costs. The husband and wife work in the shop and pay no wages to themselves or others. The economic profits from the donut shop are
A) $24,000.
B) less than $24,000.
C) more than $24,000.
D) $80,000.

Answer 1

Answer:

B) less than $24,000

Explanation:

Economic Profit is calculated by deducting the opportunity cost  and monetary costs from the revenue. Whereas Accounting Profit can be calculated by deducting the only monetary costs from the revenue.  

Economic profit = Revenue - Opportunity cost - Monetary cost

Accounting profit = Revenue - Monetary cost

Opportunity costs are all those losses which are faced for choosing an alternative like loss of interest income in case of investment in the business.

Revenue = $80,000

Monetary costs

Rent  = $36,000

Operating costs = $20,000

Total Monetary costs = $56,000

Accounting profit = $80,000 - $56,000 = $24,000

Economic profit need to deducted opportunity cost from accounting profit, which is not given, so the economic profit will be less than $24,000.

Answer 2

Answer:

B) less than $24,000.

Explanation:

Given:

Revenue: $80,000

• Renting fee: $36,000  
• Operating costs: $20,000

So earning before tax is:

Revenue - Renting fee - Operating cost

= $80,000 - $36,000 - $20,000

= $24,000

In this case, they want to know the economic profits from the donut shop, which means that it will be less than $24,000 because they did not count the wage of the husband and wife.