Answer to Question #269769 in Microeconomics for Rev

Question

Herald, a barista, earned 260,000 in 2019. But in 2021, he was retrenched and decided to open his own coffee shop. After a year, he submitted the following data :

•   He spent 45,000 on equipment.
•   He leased a small space for P70,000 a year.
•   He paid P 100,000 in wages.
•   He sold worth P950,000 of coffee a year.
•   He used P150,000 from his saving account, which pays 3% interest a year. 
•   He borrowed P250,000 at 10% a year from the bank.
•   Normal profit is P350,000 a year.

 

Compute for the following :

•    Herald's explicit costs (10 points)
•    Herald's implicit cost (10 points)
•    Herald's economic profit ( 10 points)

Answer 1

Solution:

1.). Explicit costs:

Purchase of equipment = 45,000

Rent = 70,000

Wages = 100,000

Loan bank interest = 10$\% \times$ 250,000 = 25,000

Explicit costs = 45,000 + 70,000 + 100,000 + 25,000 = 240,000

 

2.). Implicit costs:

Heralds previous earning = 260,000

Savings account interest = 150,000 $\times3\%$ = 4,500

Total implicit costs = 260,000 + 4,500 = 264,500

 

3.). Economic profit:

Economic profit = Total revenue – (Explicit costs + Implicit costs)

Economic profit = 950,000 – (240,000 + 264,500) = 950,000 – 504,500 = 445,500

Economic profit = 445,500