Basic Microeconomics Question Grace owns and operates a small pottery firm.Grace

Question

Basic Microeconomics Question

Grace owns and operates a small pottery firm.Grace hires an assistant at $12,000/year, pays annual rent of $5000 for her shop, and spends $20,000/year on materials.She has $40,000 of her own funds invested in equipment that could earn her $4000/year if invested in the stock market.She has been offered $20,000/year to work as a potter for one of her competitors.Grace would lose $3000/year in government assistance if she stays in business.Total annual revenue from pottery sales is $72,000.Calculate the accounting profit and the economic profit for Grace’s pottery business.Should Grace continue operating her own business? Why or why not?

Thank you!

Explanation / Answer

Explicit costs: $37,000 (= $12,000 for the helper + $5,000 of rent + $20,000 of materials)

Implicit costs: $27,000 (= $4,000 of forgone interest + $20,000 of forgone salary + $3,000 of entreprenuership).

Accounting profit = $35,000 (= $72,000 of revenue - $37,000 of explicit costs)

Economic profit = $8,000 (= $72,000 - $37,000 of explicit costs - $27,000 of implicit costs).

Should Grace continue operating her own business? Why or why not?

Answer: Grace should choose continue operating the business as the firm is earning accounting as well as economic profit

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