Problem2 An earthquake hit Califomia and you decided to take

Problem2 An earthquake hit Califomia and you decided to take a one-month LWOP (Leave Without Pay) from your $5,000 per month job in order to operate a kiosk selling fresh drinking water for a month. You plan to rent the kiosk at $2,500 per month from the local government and purchase water from a local wholesaler at a price of $1.34 per gallon. O: If you expect that people are willing to pay $2.25 to purchase each gallon of fresh drinking water, and 20,000 gallons of water can be sold at your kiosk. What is your economic profit? Show your calculation Problem 3 Suppose you value a special watch at $100. You purchase it for $75. On your way home from class one day, you lose the watch. The store is still selling the same watch, but the price has risen to $85. Assume that losing the watch has not altered how you value it. Should you pay the $85 to buy the watch? Why or why not? Explain.

Solution

1. Economic Profit = Total Revenue -Explicit Cost - Implicit Cost

Here Explicit Cost = Payment made to purchase fresh drinking water for kiosk system & rent paid to the local government = 20,000 * $1.34 + $2,500 = $29,300

and Implicit Cost = Salary loss as a result of leave without pay for 1 month = $5,000

Total Revenue = 20,000 * $2.25 = $45,000

Therefore Economic profit = $45,000- $29,300 - $5,000 = $10,700

2. Economic value of the watch = $100 Initial cost price of the watch = $75

and New Cost price of the watch = $85 butt the economic value remains the same for the watch

Economic profit after the loss of first watch is 0.

Still after the rise of cost of the special watch, you will have economic profit = $100-$85= $25

Therefore, you should buy new special watch even after rise in the price.