Sally owns a beauty shop that generates a total revenue of $90,000 per year. She pays her employees a total of $45,000; pays $10,000 for rent, insurance, and utilities; and pays $15,000 for beauty supplies such as hair spray and shampoo. Sally is glad to have the shop, because her next best alternative is to work as a cafeteria attendant for a salary of$8,000 a year. From this we can conclude that Sally
A) would earn more working at the cafeteria
B) makes an economic profit of $20,000
C) makes an economic profit of $12,000
D) has total explicit costs of $78,000
E) has total implicit costs of $12,000

Question

Quizplus · Accepted Answer

Sally's economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Her explicit costs are $70,000 ($45,000 + $10,000 + $15,000), and her implicit cost is $8,000 (the salary she foregoes by not working as a cafeteria attendant). Therefore, her economic profit is $90,000 - $70,000 - $8,000 = $12,000.

Sally Owns a Beauty Shop That Generates a Total Revenue