1. The owner/manager of an athletic shoe store has revenue of $260,000 per year and labor, interest, inventory, and miscellaneous expenses of $200,000. The owner also owns the building the store is located in. It would rent out for $5,000 annually. The owner has $50,000 of his/her own money invested into the store. The market interest rate is 10%. Also, the manager just got an offer to manage a Foot Locker outlet at a salary of $50,000.
(a) What and how much are the store owner’s implicit costs?
(b) What is his/her economic profit?
2. Suppose you own a firm. If you manage it yourself, you give up a job which you could earn $70,000 per year. Alternatively, you can hire a manager for $70,000. In either case, your revenue is $200,000 per year and outlays on raw materials, production workers, etc. is $110,000.
(a) What is your economic profit if you manage the firm yourself?
(b) What if you hire a manager?
(c) Are your answers to (a) and (b) the same or different? Explain.