Jessica is a young doctor who has just started her own practice. Her previous position paid her $80,000 a year. For office space, she uses a building which she owns and which she has rented in the past for $40,000 a year
Her total revenue from her new practice is $250,000. She pays $50,000 to other firms for materials and supplies, and she pays $40,000 in wages to her office nurse. Assume that Jessica's building and equipment do not depreciate and that her normal profit is $20,000. a) What is the opportunity cost of all factors of production employed by Jessica? b) What is Jessica's economic profit?
a) Jessica's opportunity costs are: the wages, $40,000; the amount she paid to other firms for material and supplies, $50,000; her forgone wages, $80,000; the forgone rent on her building, $40,000; and, the normal profit, $20,000. The opportunity cost equals the sum of all these costs and so is $230,000.
b) Economic profit equals total revenue minus total opportunity cost, or $250,000 - $230,000 = $20,000.
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