One year ago, Ms. Case and Mr. Bond opened a jewelry store called T & J. They invested $1,000,000 of their savings into the partnership to buy equipment and initial inventory

They rented a building for $90,000 a year, and hired two employees for an annual wage of $40,000 each. Case and Bond believed that the best alternative investment of their money would be government bonds, which could yield an annual return of 8 percent. To run the store, Case quit her previous job, at which she earned $100,000, but her former boss told her that she was welcome to return anytime. Bond kept his job with the government, but gave up 6 hours of leisure each week (for 50 weeks), the time he used to spend playing golf. Bond used to say: "I'd only give up my golf time if someone paid me $100 an hour." During the first year of operation, T & J paid $20,000 for utilities and the firm's total revenue was $350,000. The market value of T & J's equipment was $200,000 at the beginning of the year and $170,000 at the end of the year. a) What is the economic depreciation of their capital? b) What are T & J's opportunity costs? c) What is the firm's economic profit in the first year of operation?

a) The economic depreciation of the firm's capital is the market value of its equipment at the beginning of the year, $200,000, minus its market value at the end of the year, $170,000, so the economic depreciation is $30,000.
b) T & J's costs are: rent, $90,000; wages, $80,000; utilities, $20,000; economic depreciation, $30,000; the interest forgone, the lost interest on the $1,000,000 invested in the business, which is equal to $1,000,000 × 0.08 or $80,000; and the opportunity cost of the owners' resources, which for Case is her wage at the previous job, $100,000 and for Bond is the 300 hours of his leisure time, which he values at $100 per hour for a total opportunity cost is $100 × 300 = $30,000. Thus, T&J's total costs are $240,000.
c) A firm's economic profit is its total revenue minus its total opportunity cost. T & J's economic profit is $350,000 - $330,000 = $20,000.