Darrell is the owner of a furniture store.Last year,his total revenue was $525,000 and his total labor costs were $200,000.His overhead expenses,including insurance and legal fees,were $175,000.The rent on his building was $45,000.Darrell could earn $105,000 per year working at a nearby furniture distributor.If his total revenue increases to $600,000 this year and all of his other expenses are held constant,we know that his economic profit is now:

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting all business expenses, including both explicit (such as labor and overhead costs) and implicit (such as opportunity cost of owner's time) costs, from total revenue. Therefore, to calculate Darrell's economic profit, we subtract all of his expenses, including the opportunity cost of his time at the nearby furniture distributor, from his total revenue:

Revenue = $600,000
Labor Costs = $200,000
Overhead Expenses = $175,000
Rent = $45,000
Opportunity Cost of Owner's Time = $105,000

Economic Profit = Revenue - (Labor Costs + Overhead Expenses + Rent + Opportunity Cost of Owner's Time)
Economic Profit = $600,000 - ($200,000 + $175,000 + $45,000 + $105,000)
Economic Profit = $75,000

Therefore, Darrell's economic profit would be $75,000 if his total revenue increased to $600,000 and all of his other expenses remained constant.

Darrell Is the Owner of a Furniture Store