10 Jo quit her job at Umass where she earned 85000 a year Sh

10. Jo quit her job at Umass where she earned $85,000 a year. She cashed in $200,000 in corporate bonds that earned 3% interest annually to set up a gym. Jo has decided to buy a store front and set up exercise classes. There are 800 people who will pay $1000 a year for unlimited classes; $700 from each person goes for instructors, maintenance, equipment, insurance, depreciation etc. write your answers to the folowing questions on the onswer sheet 0 017 Joanne Spitz A. What are Jo\'s total revenues? (3 pts) B. What are Jo\'s explicit costs? In numbers (3 pts) C. What is her accounting profit? Numbers (3 pts) D. List 2 important implicit costs that Jo has not included. ( in numbers 3 pts) E. What is Jo\'s pure economic profit (loss)numbers? (3 pts

Solution

a) Total revenue is the product of price and quantity. Hence, total revenue is 1000 x 800 = $800,000

b) Explicit cost is the cost for which direct payment is done. Here this involves $700 x 800 = $560,000 in insurance and other activities. The amount of bonds cashed in is $200,000 but this is considered as own cost and is not computed. Hence explicit cost is $560,000

c) Accounting profit is the difference of total revenue and explicit cost which is $800,000 - $560,000 = $240,000.

d) The implicit cost is the cost which are not directly incurred and measure the lost opportunity. This includes the interest amount which is 3% x 200,000 = $6,000. The lost opportunity to earn is also an implicit cost and this is $85,000. Total implicit costs are $91,000.

e) Economic profit = Total revenue – total explicit cost - total implicit = $800,000 - $560,000 - $91,000 = $149,000.