Question

2. 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 is the $60,000 in foregone salary that Adam might have earned had he decided to work as a general manager for the supermarket chain.

(b) TR = Total revenue

Tc =total cost

$\pi=$ profit

Adam's accounting profit

$\pi=TR - TC_{explicit}=$ $\$200, 000 - \$180, 000 = \$20, 000$

(c) Adam's economic profit

$\pi = TR - TC_{explicit} - TC _{implicit}= \$200, 000 - \$180, 000 - \$30, 000= -\$10000$