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17 November, 07:49

You are considering quitting your job where you earn $3,200 per month and opening a new business. The cost of renting an office is $2,100 per month, hiring employees would cost $3,100 per month, and utilities would cost $100 per month. The new business will earn a total revenue of $6,500 per month. What is your economic profit?

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  1. 17 November, 07:56
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    The economic profit=-$3,000, there is incentive to exit market

    Explanation:

    The economic profit can be defined as the difference between the revenue from sales and the total cost including opportunity cost. This can be expressed as;

    P=R - (C+O)

    where;

    P=economic profit

    R=total revenue

    C=total input costs

    O=opportunity cost

    In our case;

    R=$6,500

    C = (2,100+3,100+100) = $5,300

    O=$3,200

    replacing;

    P=6,500 - (5,300+3,200)

    P=6,500-8,500=-3,000

    The economic profit=-$3,000, there is incentive to exit market
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