Sally Rand owns a ceiling fan company. She sells 1,000 ceiling fans at $50 each. Each fan costs her $20 . She uses her own money to buy the fans; she withdraws the money from her savings account where it earns 5 percent interest. Before going into the ceiling fan business, she worked as a fan-dancer at $25,000 a year. Should Sally remain in business?
If her economic profit is at least zero, Sally should stay in business. Her TR = $50,000 and her total accounting cost is $20,000 . for an accounting profit of $30,000 . She forgoes interest on savings of $20,000 (.05) = $1,000 as well as forgone earnings of $25,000 . This leaves $4,000 in economic profit, so she should stay in business.
Economics
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