Question

iain quit his job as an electrician where he earned $60,000 a year. he took $40,000 out of savings that earned 5% interest annually ($2000 in interest per year) and invested it in a martial arts school. he has 110 students willing to pay $1000 a year apiece for martial arts classes at the school. the annual costs for rent, insurance, and equipment for the studio total $50,000. what is iains economic profit or loss from this business venture?

Explanation:

Step1: Calculate total revenue

Total revenue = Number of students * Price per student. So, $110\times1000 = 110000$.

Step2: Calculate explicit costs

Explicit costs are the annual costs for rent, insurance and equipment, which is $50000$.

Step3: Calculate implicit costs

Implicit costs include the fore - gone salary and fore - gone interest. Fore - gone salary is $60000$ and fore - gone interest is $2000$. So, implicit costs = $60000 + 2000=62000$.

Step4: Calculate economic profit

Economic profit = Total revenue - (Explicit costs+Implicit costs). So, $110000-(50000 + 62000)=110000 - 112000=- 2000$.

Answer:

• $2000$ (a loss of $2000$)