Question

Suppose Juliana owns a small business making handbags. Each month she makes 18 handbags, which she sells for $100 each. The materials used to make each handbag cost $50. In addition, Juliana uses a spare room in her house to make the handbags and store her supplies. If she were not using the spare room for her business, she would use it as a guest room, an option that Juliana would value at $250 per month. If Juliana weren’t making handbags, she would work at Trader Joe’s earning $800 per month. What is Juliana’s economic profit each month?

Answer 1

Answer:

$-150

Explanation:

Sales Revenue = 18 handbags per month X $100 per handbag

                         =  $1,800

Variable costs = 18 handbags X $50 cost per handbag

                        = $900

Juliana's Net Income = $1,800 - $900

                                   = $900

Juliana's opportunity costs = $250 for renting guest room + $800 at job

                                             = $1050

Juliana's Economic Profit = Net Income - Total Opportunity Costs

                                        = $900 - $1,050

                                        = -$150

Hence, her economic profit is actually a negative 150 dollars.