Question

You are considering quitting your job where you earn $3,200 per month and opening a new business. The cost of renting an office is $2,100 per month, hiring employees would cost $3,100 per month, and utilities would cost $100 per month. The new business will earn a total revenue of $6,500 per month. What is your economic profit?

Answer 1

Answer:

The economic profit=-$3,000, there is incentive to exit market

Explanation:

The economic profit can be defined as the difference between the revenue from sales and the total cost including opportunity cost. This can be expressed as;

P=R-(C+O)

where;

P=economic profit

R=total revenue

C=total input costs

O=opportunity cost

In our case;

R=$6,500

C=(2,100+3,100+100)=$5,300

O=$3,200

replacing;

P=6,500-(5,300+3,200)

P=6,500-8,500=-3,000

The economic profit=-$3,000, there is incentive to exit market