Suppose Angelo Sessa, owner of Sezz Medi Brick Oven Pizza in NYC, earns $350,000 in revenue per year. He spends $800 a month on ash wood for his stove, $2000 a month on rent, and $1500 a month on ingredients. He used to be a lawyer and earned $240,000 a year before he opened up Sezz Medi. Normal profit for a pizza business is $30,000. If Angelo switches to oak wood to fire his stove and oak costs an extra $2500 each month, but this change causes his revenues to increase to $351,000. What is Angelo's economic profit?

Question

Quizplus · Accepted Answer

Angelo's economic profit is calculated as total revenue minus total costs, including opportunity costs. His new revenue is $351,000. His explicit costs are $800 + $2500 (oak wood) + $2000 (rent) + $1500 (ingredients) per month, totaling $6,800 per month or $81,600 annually. His opportunity cost is the $240,000 salary he gave up as a lawyer. Normal profit is $30,000. Economic profit = $351,000 - ($81,600 + $240,000 + $30,000) = -$600.

Suppose Angelo Sessa, Owner of Sezz Medi Brick Oven Pizza