(Scenario: Jillian's Cupcake Shop) Use Scenario: Jillian's Cupcake Shop.
Scenario: Jillian's Cupcake Shop
Jillian runs a cupcake shop where she sells cupcakes for $1 each. She employs five people, each of whom worked a total of 500 hours last year; she paid them $10 per hour. Her costs of equipment and raw materials add up to $75,000. Her business ability is legendary, and other companies have offered to pay Jillian $100,000 to come to work for them. She also knows she could sell her cupcake shop for $150,000. The bank in town pays an annual interest rate of 3% on all funds deposited with it. Given the information provided, Jillian's should stop selling cookies if her:
A)economic profit is positive.
B)explicit financial and implicit opportunity costs are less than her revenues.
C)implicit opportunity costs are greater than her accounting profits.
D)economic profit is equal to her accounting profit.

Question

Quizplus · Accepted Answer

Jillian's implicit opportunity costs include the $100,000 offer from other companies and the potential $150,000 she could receive from selling her cupcake shop. If her accounting profits (revenues minus explicit financial costs) are positive, but her implicit opportunity costs are greater than her accounting profits, then she is not truly making a profit. In this scenario, she should stop selling cupcakes as her economic profit (revenues minus explicit and implicit costs) would be negative.