Jane quit her job at AT and T, where she earned $29,000 a year. She cashed in $4
ID: 1157293 • Letter: J
Question
Jane quit her job at AT and T, where she earned $29,000 a year. She cashed in $40,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1,000 people who will pay $400 a year each for the commuter service, $280 from each person goes for gas, maintenance, insurance, depreciation, etc.
i. Calculate total revenue.
ii. What are the implicit costs and explicit costs in this problem?
iii. Calculate total cost
iv. Calculate accounting profit
v. Calculate economic profit
vi. Is accounting profit higher or lower than economic profit? Why? Also, based on your calculations in iv. and v., should Jane continue running her mini-bus business? Why? Explain
Explanation / Answer
Ans:
1) Total revenue = 1000 * $400
= $400,000
2) Implicit costs = $29,000 + ($40,000 * 10%)
= $29,000 + $4000
= $33,000
Explicit cost = $280 * 1000
= $280,000
3) Total cost = implicit cost + explicit cost
= $33,000 + $280,000
= $313,000
4) Accounting profit = Total revenue - explicit cost
= $400,000 - $280,000
= $120,000
5) Economic profit = Total revenue - explicit cost - implicit cost
= $400,000 - $280,000 - $33,000
= $87,000
6) Accounting profit is higher than economic profit and this is because while computing accounting profit, implicit cost is not considered.
Jane should continue running her mini-bus business because economic profit is positive.This means she can earn more income by running her mini-bus business.
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