webs John Jones owns and manages a café in Collegetown whose annual revenue is $
ID: 1113254 • Letter: W
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webs John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: fé and is willing to pay $2 Expense Amount Labor Food and drink Electricity Vehicle lease Rent Interest on loan for equipment $2,000 500 500 t instead had invested $1 a) Suppose John could earn $1,100 per year as a recycler of aluminum cans. However, he prefers to run the profit? café and is willing to pay $275 per year to run the café rather than to recycle. Is the café making an economic the café is making an economic loss of 1000 per year. No Should John stay in the café business? No, he should not stay in the café business. b) Suppose John had not had to get a $10,000 loan at an annual interest rate of 10 percent to buy equipment but instead had invested $10,000 of his own money in equipment. Calculate John's annual accounting profit. $ 750 why run o) Suppose John could earn $1,000 a year gs a recycler, and the likes recycling just as well as running the cafe ect each year to earn a normal proft? 250 How much additional revenue would the café have to collExplanation / Answer
a) Economic Profit = Total Revenue - Total cost including implicit cost
Economic Profit = 5000 - (2000 + 500 + 100 + 150 + 500 + 1000 + 1100) = 5000 - 5350 = - 350
No, firm is making economic loss of $ 350.
b) Accounting Profit = Total Revenue - Total cost excluding implicit cost
Accounting Profit = 5000 - 4250 - 10000 = - 10,750
c) $ 250
Normal profit means 0 profit
0 = TR - TC
TR = TC
TR = 2000 + 500 + 100 + 150 + 500 + 1000 + 1000
5000 + x = 2000 + 500 + 100 + 150 + 500 + 1000 + 1000
x = 5250 - 5000 = $ 250
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