Karolina owns a small diner, where she works full-time in the kitchen. Her total revenue last year was \( \$ 100,000 \), and her rent was \( \$ 3,000 \) per month. She pays her one employee \( \$ 2,000 \) per month, and the cost of ingredients and overhead averages \( \$ 500 \) per month. Karolina could earn \( \$ 35,000 \) per year as the manager of a competing diner nearby. Her total economic profit last year was OA) \( \$ 65,000 \). OB) \( \$ 34,000 \). OC) \( \$ 20,000 \). OD) \( \$ 1,000 \).
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To find Karolina’s total economic profit, we first need to calculate her total costs. She pays \( \$ 3,000 \) per month in rent, \( \$ 2,000 \) for her employee per month, and \( \$ 500 \) for ingredients and overhead. Calculating the total costs: - Rent: \( 3,000 \times 12 = 36,000 \) - Employee salary: \( 2,000 \times 12 = 24,000 \) - Ingredients and overhead: \( 500 \times 12 = 6,000 \) Total costs = Rent + Employee salary + Ingredients and overhead = \( 36,000 + 24,000 + 6,000 = 66,000 \). Now, we factor in the opportunity cost of Karolina’s potential salary, which is \( \$ 35,000 \). So her total economic costs are: Total economic costs = Total monetary costs + Opportunity cost = \( 66,000 + 35,000 = 101,000 \). Total revenue was \( 100,000 \). Now, we can calculate the economic profit: Economic profit = Total revenue - Total economic costs = \( 100,000 - 101,000 = -1,000 \). So, the correct answer is: OD) \( \$ 1,000 \). Karolina’s diner is losing \( \$ 1,000 \) in economic profit, demonstrating the importance of considering opportunity costs in business decisions.
