Your firm is selling 10,000 units of output at a price of $10 per unit. Your firm’s total explicit cost is $70,000. Your firm’s implicit cost of capital is $10,000, and your opportunity cost is $20,000.
Calculate total revenue.
Calculate total implicit cost.
Calculate your accounting profit.
Calculate your economic profit.
What does the value of your economic profit calculated in part d tell you?
1 point: Total revenue = $100,000
1 point: Total implicit cost = $30,000
1 point: Accounting profit = $30,000
1 point: Economic profit = $0
1 point: Because your firm earns normal profit, there is no better alternative use for your resources.
Sunny owns and operates Sunny’s Sno Cone Stand. Use the data in the table provided to answer the questions below.
| Sunny’s Sno Cone Stand: January | |
| Price of Sno Cone | $2 |
| Sno Cones sold | 2,000 |
| Explicit cost | $400 |
| Depreciation | $100 |
| Implicit cost of capital | $200 |
Calculate Sunny’s Sno Cone Stand’s total revenue for January.
Calculate Sunny’s Sno Cone Stand’s accounting profit for January.
What additional information does Sunny need in order to determine whether or not to continue operating the Sno Cone Stand?
Suppose these numbers remain unchanged in the long run. Explain how Sunny will determine whether or not to continue operating the business in the long run on the basis of these numbers. (4 points)
Rubric for FRQ 2 (4 points)
1 point: Total revenue = 2,000 Sno Cones sold × $2 per Sno Cone = $4,000
1 point: Accounting profit = $4,000 – $400 – $100 = $3,500
1 point: Sunny needs to know the opportunity cost of her time.
1 point: In general, a firm should continue to operate in the long run if it can earn at least normal profit (meaning zero economic profit). In Sunny’s case, she earns $3,500 in accounting profit minus the $200 implicit cost of capital and the opportunity cost of her time. Because $3,500 – $200 = $3,300, she will make at least a normal profit if the opportunity