Richard Bland quit his job as an accounting professor to start his own restauran

Question

Richard Bland quit his job as an accounting professor to start his own restaurant. He gave up a salary of $50,000 per year and withdrew $100,000 in bank CDs earning 5 percent to buy a building and equipment. In the restaurant's first year it had direct expenses of $75,000 and revenues of S150,000. The restaurant's economic profit was a. $15,000. b. $20,000. c. $75,000. d. not possible to determine from the information given. The perfectly competitive widget industry is in long-run equilibrium. A profit-maximizing manufacturer receives total revenue of $55,000. He uses his labor, $15,000 worth of wire, and $15,000 worth of steel to make the widgets. The manufacturer a. is earning an economic profit of $25,000. b. must have an opportunity cost of labor of less than $25,000. c. must have an opportunity cost of labor of exactly $25,000. d. must have an opportunity cost of labor of more than $25,000.

Explanation / Answer

1) Economic profit consists of implicit and explicit cost.

Economic profit = 150,000- 50,000- 5000- 75,000 = $20,000

Answer is b.

2) In long run, perfect competitive firm earns zero economic profit.

economic profit = 55,000 - cost of labor - 15,000 - 15,000 =0

Opportunity cost of labor = 55,000-15000-15000 = $25,000

answer is option c

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