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Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, and depreciation. She estimates that her entrepreneurial skills would have typically yielded a normal profit of $5,000 in another business. List two important implicit costs that Jane has not included in the information above. Based solely on the information given above, how much is Jane’s pure economic profit (loss)? Show your computations.

Respuesta :

Answer and Explanation:

The computation is shown below:

1. The two important implicit costs that Jane has not included is shown below

a) Quit a job at IBM at which she earned $50,000 per year

b) Losing a interest of $5,000 ($50,000 × 10%)

Therefore,

Total Implicit costs= $50,000 +$5000

= $55000

2. The pure economic profit or loss is shown below:

As we know that

Economic profits= Total revenue - Total economic costs

where,

Total economic costs= implicit cost + explicit cost

The explicit cost is

= Fixed cost + Variable cost

= $50,000 + $280 × 1,000

= $50,000 + $280,000

= $330,000

And, the implicit cost is $55,000

So,

Total economic costs  is

= $55000 + $330,000

= $385,000

Now economic profit is

= $400 × 1,000 - $385,000

= $400,000 - $385,000

= $15,000

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