Biff owns and operates a golf driving range on land that he

Biff owns and operates a golf driving range on land that he also owns. Last year his accountant calculated that his driving range makes $50,000 profits per year. Last year a property management company offered to lease Biff’s land from him for $80,000 per year forever. Calculate the economic profits of Biff’s driving range last year. If the property management company offers the same land lease deal to Biff this year, should he take the deal? Explain why or why not, and use your calculation of Biff’s economic profits in your explanation.

Solution

Its given that accounting profit of biff was $50,00 last year. This profit has not taken into account the opportunity cost of the work done by Biff on his driving range. The property management company offered to leae $80,000 per year forever. The economic profits of Biff’s driving range last year was $80,000.

to explain that biff should take the deal or not, he have to take the opportunity cost of Biff\'s work into account. Lets say he can get a wage W if he enters the job market. Thus the opportunity cost of Biff\'s work is W.

If $50,000+W is less that $80,000 then biff should take the deal as he getting a greater sum of money. If $50,000+W is less that $80,000 then biff should not take the deal