1. How can a business owner who earns $10 million/year from his or her business
ID: 1190973 • Letter: 1
Question
1. How can a business owner who earns $10 million/year from his or her business credibly claim to earn zero economic profit?
2. Is it possible for the short-run run market supply curve to show that quantity supplied increases only if price increases and for the long-run market supply curve to indicate that market price does not increase as quantity supplied increases? Why or why not?
3. John Jones owns and manages a cafe in Collegetown. His monthly revenue is $5000. Monthly expenses are shows in the following list:
a. Calculate John's monthly accounting profit.
b. John could earn $1000/month as a recycler of aluminum cans. However, he prefers to run the cafe. In fact, he would be willing to pay up to $275/month to run the cafe than to recycle. Is the cafe making an economic profit? Will John stay in the cafe business? Explain.
c. Suppose the cafe's revenues and expenses remain the same, but recycler's earnings rise to $1100/month. Is the cafe still making an economic profit? Explain.
d. Suppose that intead of borrowing $10,000 at a monthly interest rate of 10% to buy equipment, John had invested $10,000 of his own money in equipment. How would you answers to part (a) and (b) change?
e. If John can earn $1000/month as a recycler and he likes recycling just as well as running the cafe, how much additional revenue would the cafe have to collect each month to earn a normal profit?
4. Supposed the city of Vancouver has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $100,000/year. Paying this salary, each of the 199 firms makes a normal profit on $500,000 in revenue. However, the 200th company employs Janus Jacobs, an unusually talented designer. This company collects $1,000,000 in revenues because of Jacob's talent.
a. How much will Jacobs earn? What proportion of his annual salary will be economic rent?
b. Why won't the advertising company for which Jacobs works be able to earn an economic profit?
5. You have a friend who is a potter. He holds a permanent patent on an indestructible teacup whose sale generates $30,000/year more revenue than production costs. If the annual interest rate is 20%, what is the market value of his patent?
Labour $2000 Food & Drink $500 Electricity $100 Vehicle Lease $150 Rent $500 Interest on loan for equipment $1000Explanation / Answer
1.
Before going into the economic profit, the accounting profit should be remembered as below:
Accounting profit = Total revenues – Total expenses
Economic profit is just and extended form of accounting profit. It covers the whole economy. If someone earns $10 million as an accounting profit some other or others have to lose $10 million as well. It means one’s gain by way of others’ loss.
Economic profit also counts opportunity cost. See below:
Economic profit = Accounting profit – Opportunity cost
Opportunity cost: The benefit foregone for choosing an alternative action is known as opportunity cost.
Suppose the business owner who earns $10 million is engaging with transportation business. If he could engage with restaurant business then he expects to earn $10 million too. Therefore, his economic profit is as below:
Economic profit = Accounting profit – Opportunity cost
= $10 million - $10 million
= 0
In this case he can claim zero economic profit.
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