Question

Kayne runs a specialty running store. Last year, he earned $50,000 in revenue and had explicit costs of $20,000. Kayne could have made $42,000 selling video games on the Internet and received an additional $5,000 if he rented out the store and equipment. Calculate Kayne’s implicit costs.

Answer 1

Kayne's implicit costs are the sum of the earnings he forgoes by not pursuing the next best alternative to running his store, resulting in a total of $47,000. This is calculated by adding the potential income from selling video games, $42,000, and the income from renting out the store and equipment, $5,000.

Step-by-step explanation:

To calculate Kayne's implicit costs for running a specialty running store, we must consider the opportunities he foregoes to operate his business. In economics, an implicit cost is the income a business owner could have earned by choosing the next best alternative with their resources. In Kayne's case, he could have made $42,000 selling video games on the Internet plus an additional $5,000 if he rented out the store and equipment. Therefore, to find the total implicit costs for Kayne, we add up these two potential earnings:

Alternative income from selling video games: $42,000

Income from renting out store and equipment: $5,000

By summing these figures, we get Kayne's total implicit costs:

Total implicit costs = $42,000 + $5,000 = $47,000.

Kayne's implicit costs are the sum of the income he forgoes from the next best alternative to running his store, which amounts to $47,000 in this scenario. It's important to include both explicit and implicit costs when calculating the economic profit to determine the true profitability of a business.

Answer 2

We can start by using the formula for calculating economic profit:

economic profit = total revenue - explicit costs - implicit costs

We are given that Kayne earned $50,000 in revenue and had explicit costs of $20,000. We also know that if he had sold video games on the Internet, he could have made $42,000, and if he had rented out the store and equipment, he could have received an additional $5,000. These represent the opportunity costs of running his specialty running store.

So, we can calculate Kayne's implicit costs as follows:

implicit costs = opportunity cost of selling video games + opportunity cost of renting out the store and equipment

implicit costs = $42,000 + $5,000

implicit costs = $47,000

Now, we can substitute this value into the economic profit formula:

economic profit = $50,000 - $20,000 - $47,000

economic profit = -$17,000

The negative value indicates that Kayne did not earn a positive economic profit, meaning that his explicit and implicit costs were greater than his revenue.