Say Sally's Super Shoes has total revenues of $20,000, explicit costs of $15,000, and implicit costs of $5,000. Sally should:A.be happy to know she's earning a normal profit and stay in business.B.find another job; she's earning an economic profit of zero.C.tell her accountant her accounting profit is zero.D.be happy; her economic profit is $15,000.E.watch out for new competitors who will start selling shoes, attracted by her economic profit.
Question
Say Sally's Super Shoes has total revenues of 15,000, and implicit costs of 15,000.E.watch out for new competitors who will start selling shoes, attracted by her economic profit.
Solution
The correct answer is A. Sally should be happy to know she's earning a normal profit and stay in business.
Here's why:
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First, we need to understand what explicit and implicit costs are. Explicit costs are out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials. Implicit costs are the opportunity costs of using resources already owned by the firm.
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In this case, Sally's Super Shoes has explicit costs of 5,000. So, the total cost (explicit + implicit) is $20,000.
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The total revenue of Sally's Super Shoes is also $20,000.
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Economic profit is calculated as total revenue minus total cost (including both explicit and implicit costs). So, in this case, the economic profit is 20,000 = $0.
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When economic profit is zero, it means the firm is earning a normal profit. This is because all the costs (including opportunity costs) are being covered and there's no extra profit that could have been earned elsewhere.
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Therefore, Sally should be happy to know she's earning a normal profit and stay in business.
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