Final answer:
Juan's opportunity cost of running his own law practice is $95,000, comprising of explicit costs for secretary salary and utilities ($45,000), and the implicit cost of his former salary ($50,000). With a revenue of $100,000, his economic profit is $5,000, indicating the business is economically viable.
Step-by-step explanation:
The calculation of Juan’s opportunity cost (economic costs) of running his own business involves considering both explicit and implicit costs. Explicit costs for his business include the secretary’s salary ($20,000) and expenses for rent and utilities ($25,000). However, the implicit cost, which is the foregone salary from not working at his previous firm, is $50,000. To find the total economic costs, we must add these up:
Explicit costs: Secretary’s salary + Rent and utilities = $20,000 + $25,000 = $45,000
Implicit costs: Foregone salary from previous employment = $50,000
Total economic costs: $45,000 (explicit) + $50,000 (implicit) = $95,000
Knowing the total economic costs helps to understand whether Juan’s law office, which generates $100,000 in annual revenue, is economically successful. Subtracting the economic costs from the revenue gives us:
Economic profit: Revenue - Economic costs = $100,000 - $95,000 = $5,000
If Juan’s economic profit is above zero, then his business venture is considered economically viable.