Ralph owns a small pizza restaurant,where he works full-time in the kitchen.His total revenue last year was $100,000,and his rent was $3,000 per month.He pays his one employee $2,000 per month,and the cost of ingredients and overhead averages $500 per month.Ralph could earn $35,000 per year as the manager of a competing pizza restaurant nearby.His total economic profit for the year was:

Question

Quizplus · Accepted Answer

To calculate economic profit, we need to subtract all explicit and implicit costs from total revenue. 
Explicit costs:
Rent: $3,000 per month x 12 = $36,000
Employee salary: $2,000 per month x 12 = $24,000
Ingredients and overhead: $500 per month x 12 = $6,000 
Total explicit costs = $66,000
Implicit costs:
The opportunity cost of Ralph's time is the $35,000 he could earn as a manager at a competitor's restaurant.
Total implicit costs = $35,000
Total costs = explicit costs + implicit costs = $66,000 + $35,000 = $101,000
Economic profit = Total revenue - Total costs = $100,000 - $101,000 = -$1,000
Ralph's economic profit for the year is -$1,000, which means he did not earn enough to cover all his expenses, including the opportunity cost of his time. Therefore, the best choice is B: -$1,000.

Ralph Owns a Small Pizza Restaurant,where He Works Full-Time in the Kitchen.His