Answer to Question #118325 in Microeconomics for R.K.Brar

Question

Suppose you are earning $22,000 a year working as a sales representative for a T-shirt manufacturer. At some point you decide to open a retail store of your own to sell T-shirts. You invest $20,000 of savings that has been earning an interest income of $1000 per year. You decide that your new firm will occupy a small store that you currently own and have been renting out for $5000 per year.

A year after you open the store you total up your accounts and find the following:

Total sales revenue……………………………………………………$120,000
Cost of T-shirts……………………………..$40,000
Clerk’s salary………………………………. 18,000
Utilities (bills from hydro, internet, etc.)………5,000

a. What are the total explicit costs?
b. What are the total implicit costs?
c. According to an Accountant, what is your annual profit?
d. What is your annual

Answer 1

a. Total explicit costs = total operating costs + interest expenses

Explicit costs = Cost of T-shirts + labor costs (Clerk’s salary) + Utilities cost

Explicit costs = $40,000 + $18,000 + $5,000 = $63,000

b. Total implicit costs (opportunity costs) = salary + savings + interest earned

Implicit costs = $22,000 + $1,000 + $20,000 = $ 43,000

c. Accounting profit (profit before income tax) = total revenue – explicit costs

Accounting profit = $120,000 - $63,000 = $57,000

d. What is your annual

Economic profit = total revenue – total costs (explicit costs+ implicit costs)

Economic profit = $120,000 - $63,000 - $43,000 = $14,000