Question

1. A grocery shop is owned by Mr. Moore and has the following statement of revenues and costs $250,000 Revenues Supplies Electricity Employee salaries Mr. Moore's salary $25,000 $6,000 $75,000 $80,000 Mr. Moore always has the option of closing down his shop and renting out the land for $100,000. Also, Mr. Moore himself has job offers at a local supermarket at a salary of $95,000 and at a nearby restaurant at $65,000. He can only work one job, though. What are the shop's accounting costs? What are Mr. Moore's economic costs? Should Mr. Moore shut down his shop?

Answer 1

Accounting costs = Explicit Costs

Accounting Profit= Total Revenue- Explicit Costs

Economic costs= Explicit Costs+ Implicit Costs

Economic Profit= Total Revenue-Explicit Costs-Implicit Costs

Explicit costs: Direct Costs

Implicit Costs: Indirect Costs

The Shop's accounting costs can be calculated by adding all the explicit costs(Supplies,electricity,employee salaries,Mr Moore's salary)= 25000+6000+75000+80000=186000(Accounting Costs)

Mr Moore's Economic costs ,if he takes up the job at the local supermarket=EC1= Accounting costs+100,000+95000=381000

Mr Moore's Economic costs, if he takes up the job at the nearby restaurant=EC2=Accounting costs+100000+65000=351000

Accounting Profit= Total Revenue-Accounting Costs

= 250000- 186000=64000

Mr Moore's Economic Profit if he takes up the job at the local supermarket= Total Revenue-Acccounting Costs-EC1= 250000-381000-186000=-317000

Mr Moore's Economic Profit if he takes up the job at the nearby restaurant= Total revenue-Accounting Costs-EC2= 250000-351000-186000=-287000

Mr Moore should shut down the shop because the economic profits turn out to be negative. He should shut down the shop and rent out the land as well as take up a job at the local supermarket. Thereby he will earn better than what he used to earn when he was running the shop.