Question

dane decides to give up a job earning $110,000 per year as a corporate lawyer and converts the duplex that he owns into a ufo museum. (he had been renting out the duplex for $21,000 a year.) his direct expenses include $55,000 per year paid to his assistants and $21,000 per year for utilities. fans flock to the museum to see his collection of extraterrestrial paraphernalia, which he easily could sell on ebay for $1,050,000. over the course of the year the museum brings in revenues of $105,000.
a. how much is danes economic profit for the year?
o a. $68,000 - interest forgone on the $1,050,000 extraterrestrial gear
o b. $102,000 - interest forgone on the $1,050,000 extraterrestrial gear
o c. - $102,000 - interest forgone on the $1,050,000 extraterrestrial gear
o d. - $68,000 - interest forgone on the $1,050,000 extraterrestrial gear

Explanation:

Step1: Calculate explicit costs

Explicit costs = assistants' pay + utilities
Explicit costs = \(55000 + 21000=\$76000\)

Step2: Calculate implicit costs

Implicit costs = lost job income + lost duplex rent + (if we assume interest rate \(r\), interest on \(\$1050000\) is \(1050000r\), but since no interest rate is given, we first calculate other parts). Lost job income is \(\$110000\), lost duplex rent is \(\$21000\). So non - interest implicit costs \(=110000 + 21000=\$131000\)

Step3: Calculate economic profit formula

Economic profit \(=\text{Revenue}-\text{Explicit Costs}-\text{Implicit Costs}\)
Revenue \(=\$105000\)
Economic profit \(=105000-76000-(110000 + 21000)-1050000r\)
\(=105000 - 76000-131000-1050000r\)
\(=-102000-1050000r\)

Answer:

C. \(-\$102,000-\) Interest forgone on the \(\$1,050,000\) extraterrestrial gear