Homework SourseRefer to the table below The table shows the monthly economi
Refer to the table below. The table shows the monthly economic profit of a drugstore.
$21,000
$4,000
If the owner of the drugstore hired a manager for $15 an hour to take his place, how much of a change would show up in:
Instructions: Enter your responses as a whole number. Indicate a negative response with a (-) negative sign.
(a) Accounting profits per month?
$
(b) Economic profits per month?
$
| Total (gross) revenues per month | $ 27,000 |
| less explicit costs: | |
| Cost of merchandise sold | $17,000 |
| Wages to cashier, stock, and delivery help | 2,500 |
| Rent and utilities | 800 |
| Taxes | 700 |
| Total explicit costs | $21,000 |
| Accounting profit (revenue minus explicit costs) | $6,000 |
| less implicit costs: | |
| Wages of owner-manager, 300 hours @ $10 per hour | $3,000 |
| Return on inventory, 10% per year on $120,000 | 1,000 |
| Total implicit costs | $4,000 |
| Economic profit (revenue minus all costs) | $2,000 |
Solution
ANSWER:
A) Accounting profit per month will change by $4,500 ( no of hours * wage per hour = 300 * $15 = $4,500) as hiring a manger would account into explicit costs and accounting profit would come down from $6,000 - $4,500 = $1,500
B) Economic profit = accounting profit - implicit costs = $1,500 - $1,000 ( return on inventory) = $500
