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Pepe gets 30000 TL from his parents as a graduation present and decides to open a small pub called “Olé” that sells only Alhambra beer and Spanish tortilla
Pepe gets 30000 TL from his parents as a graduation present and decides to open a small pub called “Olé” that sells only Alhambra beer and Spanish tortilla. He spends all the money to buy a fridge, a washing machine, tables, chairs, beer glasses, and plates for the chips. The monthly rent for the place is 3500 TL. Pepe employs 2 waiters and pays a monthly salary of 2500 TL to each waiter. The pub incurs a cost of 1000 TL/month for electricity, and 500 TL/month for water. Pepe buys each bottle of Alhambra beer for 2 TL, and each Spanish tortilla for 3 TL. Each month, he sells 4000 bottles of Alhambra beer at a price of 5 TL, and 3000 Spanish tortillas at a price of 6 TL.
- (3 pts) Calculate the monthly total revenue of Pepe’s pub.
- (6 pts) Calculate the monthly explicit costs of Pepe’s pub.
- (3 pts) According to Pepe’s accountant, how much is the monthly accounting profit of the pub?
(7 pts) Pepe has a friend, Jose, who is an economist. Jose tells Pepe that he could earn a 10% rate of return per month on his graduation present, if he purchased government bonds with comparable risks (instead of opening the pub). Moreover, Jose tells Pepe that if instead of opening the bar he finds a job, he could earn a wage of 5000 TL per month. Given that information calculate the pub’s monthly economic profits. Justify your answer.
Expert Solution
(a)
Total revenue (TL) = 4,000 x 5 + 3,000 x 6 = 20,000 + 18,000 = 38,000
(b)
Explicit costs (TL) = Rent + Waiter salary + Electricity + Water + Material costs
= 3,500 + (2 x 2,500) + 1,000 + 500 + (4,000 x 2) + (3,000 x 3)
= 5,000 + 5,000 + 8,000 + 9,000
= 27,000
(c)
Accounting profit (TL) = Revenue - Explicit costs
= 38,000 - 27,000
= 11,000
(d)
Implicit cost (TL) = Interest income given up + Wage income given up
= (30,000 x 10%) + 5,000
= 3,000 + 5,000
= 8,000
Economic profit (TL) = Accounting profit - Implicit cost
= 11,000 - 8,000
= 3,000
Since economic profit is positive, he should continue the business.
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