Ernie's economic profit for the year is $10,000. This means that he earned $10,000 more from his store than he would have earned as a financial advisor, taking into account both his explicit costs and his opportunity costs.
In this scenario, Ernie has given up his job as a financial advisor to open up a store selling spot remover to Dalmatians. Ernie invested $10,000 in the store, which had been in savings earning 5 percent interest. This year, the store's revenues were $50,000, and explicit costs were $10,000. To calculate Ernie's economic profit, we need to subtract his explicit costs and his opportunity costs from his revenues. Explicit costs are the direct expenses that Ernie incurred to run his store, such as rent, wages, and materials. In this case, his explicit costs were $10,000. Opportunity costs are the benefits that Ernie gave up by leaving his job as a financial advisor. In this case, his opportunity cost is the $30,000 per year that he would have earned as a financial advisor. To calculate his opportunity cost for the year, we need to divide $30,000 by 12 months to get $2,500 per month.
Ernie's total opportunity cost for the year is $2,500 x 12 = $30,000.
To calculate Ernie's economic profit, we need to subtract his explicit costs and his opportunity costs from his revenues.
Ernie's revenues: $50,000
Ernie's explicit costs: $10,000
Ernie's opportunity costs: $30,000
Ernie's economic profit: $50,000 - $10,000 - $30,000 = $10,000
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