Ralph owns a small pizza restaurant, where he works full-time in the kitchen

Economics Apr 01, 2021

Ralph owns a small pizza restaurant, where he works full-time in the kitchen. His total revenue is $100,000 a year, and his rent is $36,000 a year. He pays his one employee $24,000 a year, and the cost of ingredients and overhead averages $60,000 a year. Also, Ralph forgoes $35,000 per year as the manager of a competing pizza restaurant nearby. His economic profit for the year was:
0 $55,000. 0 -$55,000.
0 -$20,000.
0 $20,000. 0 $34,000.

Expert Solution

Computation of Economic Profit:

Economic Profit= Total Revenue-Explicit Costs-Implicit Costs

Here,

Total Rent paid=$36000
Total employee payment=$24000
Total ingredient and overhead=$60000

Explicit Costs=36000+24000+60000=$120000
Implicit Costs=The opportunity cost of not working as a manager=$35,000

Economic Profit =100,000-(120000)-(35000) =-$55,000

So, the correct option is 2nd -"$55,000".

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