Question

Audra runs an antiques store. Last year, she earned $35,000 in revenue and had explicit costs of $8,000. Audra could have made $29,750 driving a boat in a water ski show and received an additional $10,000 if she had used the company's inputs in a different way. Calculate Audra’s economic profit.

Answer 1

Audra’s economic profit is calculated by subtracting both explicit and implicit costs from her total revenues. After accounting for these costs, Audra’s economic profit is a loss of $12,750.

Step-by-step explanation:

To calculate Audra’s economic profit, we must consider both explicit and implicit costs. Audra’s accounting profit is the total revenue minus explicit costs, which amounts to $35,000 - $8,000 = $27,000. However, we must account for the opportunity cost of what she could have earned elsewhere (driving a boat in a water ski show), which is an implicit cost of $29,750, and the $10,000 she could have earned by using the company's inputs differently.

Subtracting both the explicit costs of $8,000 and the total implicit costs of $39,750 ($29,750 + $10,000) from her total revenues of $35,000, we get:

Economic profit = Total revenues - Explicit costs - Implicit costs
= $35,000 - $8,000 - $39,750 = -$12,750

Therefore, Audra’s economic profit is a negative $12,750, which means her business is not covering all its opportunity costs and is essentially taking a loss when considering the next best alternative uses of her time and resources.