Mr. Blowfish opened a seafood store in December. He borrowed $60,000 from a bank at an annual interest rate of 8 percent. He used the funds he borrowed to purchase $60,000 of capital equipment. Over the year, he rented a building for $50,000 a year

Question

During the first year of operation, Blowfish paid $45,000 to his employees, $20,000 for utilities, and $25,000 for raw fish he bought from other firms. In December of the next year, the market value of his capital was $50,000. Blowfish's best alternative to running the seafood store is to work for a grocery store as a sales clerk for $20,000 a year. a) What is the economic depreciation of Blowfish's capital? b) What are Blowfish's total opportunity costs? c) What is Blowfish's economic profit?

Answer 1

a) Economic depreciation is the change in the market value of capital over a given period. The market value of Blowfish's capital was $60,000 at the beginning of the period and $50,000 at the end. So the economic depreciation is $60,000 - $50,000 = $10,000.
b) Blowfish's costs are: the economic depreciation, $10,000; the forgone income, which is the $20,000 he could have earned working for a grocery store; the wages paid, $45,000; rent, $50,000; utilities, $20,000; interest paid, $4,800; and raw fish bought, $25,000. So Blowfish's total cost is $174,800.
c) Economic profit equals total revenue minus total opportunity costs. Blowfish's total revenue is $165,000 and his total opportunity cost is $174,800. So his economic profit is $165,000 - $174,800 = -$9,800, which means that Blowfish incurred an economic loss of $9,800.