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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UpStudy AI · Accepted Answer

To calculate Karolina's total economic profit, we need to consider both her total revenue and her total costs, including both explicit and implicit costs.

### Step 1: Calculate Total Revenue
Karolina's total revenue is given as:
$$
\text{Total Revenue} = 100,000
$$

### Step 2: Calculate Explicit Costs
Explicit costs include rent, employee wages, and the cost of ingredients and overhead.

1. **Rent**: 
   $$
   \text{Annual Rent} = 3,000 \times 12 = 36,000
   $$

2. **Employee Wages**: 
   $$
   \text{Annual Wages} = 2,000 \times 12 = 24,000
   $$

3. **Cost of Ingredients and Overhead**: 
   $$
   \text{Annual Overhead} = 500 \times 12 = 6,000
   $$

Now, we can sum these explicit costs:
$$
\text{Total Explicit Costs} = \text{Annual Rent} + \text{Annual Wages} + \text{Annual Overhead}
$$
$$
\text{Total Explicit Costs} = 36,000 + 24,000 + 6,000 = 66,000
$$

### Step 3: Calculate Implicit Costs
Implicit costs include the opportunity cost of Karolina's time, which is the salary she could earn as a manager of a competing diner:
$$
\text{Implicit Costs} = 35,000
$$

### Step 4: Calculate Total Costs
Total costs are the sum of explicit and implicit costs:
$$
\text{Total Costs} = \text{Total Explicit Costs} + \text{Implicit Costs}
$$
$$
\text{Total Costs} = 66,000 + 35,000 = 101,000
$$

### Step 5: Calculate Economic Profit
Economic profit is calculated as:
$$
\text{Economic Profit} = \text{Total Revenue} - \text{Total Costs}
$$
$$
\text{Economic Profit} = 100,000 - 101,000 = -1,000
$$

Since the economic profit is negative, it indicates a loss. However, the options provided do not include a negative value. The closest interpretation of the economic profit in this context would be:

- **Economic Profit**: $$ -1,000 $$ (indicating a loss of $$ 1,000 $$)

Thus, the answer is:
**OD) $$ \$ 1,000 $$** (interpreted as a loss).
Karolina's total economic profit last year was a loss of \$1,000.

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