Professor Rush decided 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

Question

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 explicit costs, implicit costs, and economic profit.

Answer 1

The explicit costs are the cost of labor, the rent, the utilities, and the cost of the shoes. Thus the explicit cost equals $30,000 + $18,000 + $1,200 + $60,000 = $109,200. The implicit costs are the forgone income from the job he quit, the forgone interest, and the normal profit. The forgone interest is
(8 percent) × ($60,000 ) = $4,800, so the total implicit costs equals $50,000 + $4,800 + $20,000 = $74,800. The economic profit equals the total revenue minus the total opportunity cost and the total opportunity cost equals the sum of the explicit and implicit costs. Therefore the total opportunity cost is $109,200 + $74,800 = $184,000. Thus the economic profit = $200,000 - $184,000 = $16,000.