Sheila's Sports Shop is a very popular sporting goods store, which has yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a university swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends
$230,000 purchasing goods for resale to her customers. She also has four employees, who each earn
$25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's economic profit is equal to
A) $250,000 per year.
B) $160,000 per year.
C) $270,000 per year.
D) $200,000 per year.

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, explicit costs include the cost of goods ($230,000) and employee salaries (4 employees * $25,000 = $100,000), totaling $330,000. Implicit costs include the opportunity cost of Sheila's next best employment option ($50,000, as a university swimming coach) and the rental income foregone by using the building for the shop ($20,000), totaling $70,000. Thus, the total costs (explicit + implicit) are $400,000 ($330,000 + $70,000). Subtracting this from the total revenue ($600,000) gives an economic profit of $200,000.

Sheila's Sports Shop Is a Very Popular Sporting Goods Store