Carol quit her job at Microsoft where she earned $50,000 a year. She cashed in $
ID: 2507009 • Letter: C
Question
Carol quit her job at Microsoft where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Carol has decided to buy the mini-bus and set up a commuter service between LA and San Francisco. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, and depreciation. She estimates that her entrepreneurial skills would have typically yielded a normal profit of $5,000 in another business.
a. Complete the following: (i) What are Carol's total revenues? (ii) What are Carol's explicit costs? (iii) What is her accounting profit?
b. List the important implicit costs that Carol has not included.
c. What is Carol's economic profit (loss)?
Your answers should be fully justified and all necessary calculations shown.
Explanation / Answer
a. Carol's total revenues = 1000*400 = $400,000
Carol's explicit costs = Operating cost + interest = 280*1000+10%*50000 = $285,000
accounting profit = 400,000-285,000 =$115000
b. important implicit costs that Carol has not included :
1. Money earned in microsoft = $50,000
2. Money earned through her entrepreneurial skills that would have typically yielded a normal profit of $5,000
c. Economic Profit = Revenue - (Costs + Opportunity Cost) = 400,000 -(285,000 + 50,000) = 65000