Professor Rush decides to quit teaching economics and opens a shoe store out at the mall. He gave up an annual income of $50,000 to open the store. A year after opening the shoe store, the total revenue for the year was $200,000
Rush's expenses were $30,000 for labor, rent was $18,000, and utilities were $1,200. He also had to purchase new shoes from manufacturers, at a cost of $60,000, which was financed by cashing in his savings of $60,000 that had been in a bank earning 8 percent per year. The normal profit from operating a shoe store in the mall is $20,000. Determine Professor Rush's total cost and economic profit.
The costs are the cost of labor, the rent, the utilities, the cost of the shoes, the forgone interest, the foregone salary, and the normal profit. The forgone interest is (8 percent) × ($60,000 ) = $4,800, so the total cost equals $30,000 + $18,000 + $1,200 + $60,000 + $4,800 + $50,000 + $20,000 = $180,000. The economic profit equals the total revenue minus the total opportunity cost so the economic profit = $200,000 - $184,000 = $16,000.
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