Question

Ebon opened up a small coffee shop which earned him $175,000 in total revenue the first year. To do this, Ebon had to quit his previous job as a barista where he earned $25,000 per year. Ebon calculated his economic profit to be $10,000, but he wants to know what his explicit costs were. What are Ebon's explicit costs?

Answer 1

Ebon's explicit costs are $140,000

Step-by-step explanation:

Explicit costs are all those which is directly paid to operate the business like wages, material etc. On the other hand implicit cost is the opportunity cost to choose and alternative.

Economic profit is the net of Revenue, Implicit and explicit costs.

Economic profit = Revenue - Explicit cost - Implicit costs

As we know salary earning of the let job is opportunity cost.

$10,000 = $175,000 - Explicit cost - $25,000

$10,000 = $150,000 - Explicit cost

Explicit cost = $150,000 - $10,000 = $140,000