Question

Adam is the owner of a small grocery store in a busy section of Boulder, Colorado. Adam’s annual revenue is $200,000 and his total explicit cost (Adam pays himself an annual salary of $30,000) is $180,000 per year. A supermarket chain wants to hire Adam as its general manager for $60,000 per year. 

a. What is the opportunity cost to Adam of owning and managing the grocery store ? 

b. What is Adam’s accounting profit ? 

c. What is Adam’s economic profit ?

Answer 1

a)Opportunity cost = $60,000 per year.

Opportunity cost is defined as the value of the foregone alternative where choice has been made. Adam will forgo the $60,000 salary he would have earned by being a supermarket manager.

Thus, his opportunity cost = the supermarket salary forgone which is $60,000 per year.

b)Accounting profits

= Total revenue $-$ Total explicit costs

$= \$200,000-\$180,000$

Accounting profits =$20,000 per year.

c)Economic profit ;

Accounting profitss$-$ Opportunity Cost

$= \$20,000-\$60,000$

= $-$ $40,000 per year