Question

Nathan runs a movie memorabilia website. Last year, he earned $35,000 in revenue and had explicit costs of $8,000. Nathan could have made $30,000 working for a security company and received an additional $5,000 if he had used the company's inputs in a different way. Calculate Nathan's economic profit.

Answer 1

Nathan's economic profit is negative $8,000 when considering both his $8,000 in explicit costs and $35,000 in implicit costs, which are the forgone salary and alternative use of the company's inputs.

Step-by-step explanation:

To calculate Nathan's economic profit, we need to consider both explicit and implicit costs. In this case, Nathan's revenue is $35,000. His explicit costs, such as rent, utilities, or website maintenance, are $8,000. However, Nathan also has implicit costs, which are the opportunities he gave up to run his business. These include the salary of $30,000 he could have earned at the security company and the $5,000 he could have made using the company’s inputs differently.

To calculate economic profit, we use the formula: Economic profit = Total revenues - Explicit costs - Implicit costs. Plugging Nathan's figures into this formula gives us:

Economic profit = $35,000 (total revenues) - $8,000 (explicit costs) - $35,000 (implicit costs)

Economic profit = -$8,000

Thus, Nathan's economic profit is negative $8,000. This indicates that Nathan would have been financially better off by $8,000 if he had worked for the security company and utilized the inputs in the alternative way.