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?
What will be an ideal response?
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 (0.05) = $1,000 as well as forgone earnings of $25,000. This leaves $4,000 in economic profit, so she should stay in business.
You might also like to view...
If an industry consists of only two firms with equal market shares, then the Herfindahl index is
a. 50 b. 100 c. 2,500 d. 5,000 e. 10,000
If perfectly competitive industry B is currently realizing economic profits, we would expect that:
a. industry output will fall, good B will fall in price, and economic profits will tend to disappear. b. industry output will fall, good B will rise in price, and economic profits will tend to disappear. c. industry output will rise, good B will fall in price, and economic profits will tend to disappear. d. industry output will rise, good B will fall in price, and economic profits will tend to increase.