4. Joe Holiday operated a business renting beach umbrellas this past summer. He

Question

4. Joe Holiday operated a business renting beach umbrellas this past summer. He operated the concession for 3 months. Joe knew that rain was frequent along this stretch of beach, but he was luck and enjoyed 60 rentable days this season. On each rentable day Joe rented 40 umbrellas per day at $10 per rental. He ran the concession by himself, but had to pay Beachcomber Enterprises $10,000 for the concession (the use of the umbrellas and for the beachfront rental location). Suppose Joe could have earned $10,000 working construction.

a. What were Joe’s Accounting Profits for undertaking the business? What were his Economic Profits?

Accounting profits (pA):______________________________________________


Economic profits (pE):_ ____________________________________________

Did Joe realize positive economic profits from the venture? If so, to what were these profits attributable?

Positive economic profits? ( Y / N )

Justification: _______________________________________________________

Explanation / Answer

Accounting profits (pA):
     TR – TCEX = 60(40)*10 – 10,000 = 24,000 – 10,000 =14,000

Economic profits (pE):
     TR – [TCEX +TCIM]= 60(40)*10 – [10,000+ 10,000] = 24,000 – 20,000 =4,000

Positive economic profits? ( Y / N )

Justification: Possibilities:
a) He has a monopoly right to the location
b) He is taking a risk

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