Suppose a family-owned donut shop has $80,000 in total revenues, $36,000 in rent, and $20,000 in additional operating costs. The husband and wife work in the shop and pay no wages to themselves or others. The economic profits from the donut shop are

Question

Quizplus · Accepted Answer

Economic profits are calculated by subtracting total explicit and implicit costs from total revenues. In this case, explicit costs include rent and additional operating costs, which amount to $56,000 (36,000 + 20,000). Implicit costs include the lost opportunity costs of the husband and wife's labor, which should also be considered a cost of production. Since they pay no wages to themselves or others, the implicit costs are equal to zero. Thus, the economic profits are $24,000 ($80,000 - $56,000), less than $24,000 as per option B.

Suppose a Family-Owned Donut Shop Has $80,000 in Total Revenues