Bud opened a flower shop. He rented a building for $9,000 a year. To buy equipment for the store, he withdrew $10,000 from his savings account, which earned an annual interest rate of 3 per cent. During the first year of operation, Bud paid $4,000 for utilities and $12,000 to his suppliers. The store's total annual revenue was $55,000. The market value of the store's equipment at the end of the year was $8,000. If Bud had not started this business, he would have continued to work as an employee at another flower shop for $30,000 a year. During the first year of operation, Bud
A) received an economic profit of $20,000.
B) incurred an economic loss of $2,300.
C) received an economic profit of $30,000.
D) incurred an economic loss of $12,300.

Question

Quizplus · Accepted Answer

To calculate economic profit, we consider both explicit and implicit costs. Explicit costs include rent ($9,000), utilities ($4,000), and payments to suppliers ($12,000), totaling $25,000. The implicit costs include the opportunity cost of Bud's salary ($30,000) and the interest lost by withdrawing his savings ($10,000 * 3% = $300). The depreciation of equipment ($10,000 - $8,000 = $2,000) is also an implicit cost. Adding these together, the total implicit cost is $32,300. The total cost (explicit + implicit) is $57,300. Subtracting this from the total revenue ($55,000) results in an economic loss of $2,300.

Bud Opened a Flower Shop