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Let's explore the business of Charlie the Weaver. He owns a loom which he could sell for $100,000, but instead uses himself. He spends 1250 hours per year on his weaving. He makes little square placemats of different Hollywood scenes that sell for $7 each. Charlie spends $10,000 per year on all of the expenses of his business. Currently, and into the foreseeable future, Charlie sells 5500 placemats per year. He has been offered a job at a large textile plant where he can make $20 per hour, but this would force him to close his business. His brother-in-law is a stock broker and tells him that he can get him a guaranteed 5% return on any money he chooses to invest.

a) Find the economic profit and accounting profit of Charlie's business and describe whether or not he would stay in business.

b) For each of the following changes, describe whether they change the accounting profit, economic profit, neither, or both, and by how much. Be sure to consider each part separately, not cumulatively.

i) The brother-in-law is arrested and now Charlie can only put his money in the bank and earn 2%.

ii) He hires an additional worker, who he pays $2500 per year, cuts back his own hours to 1000, and keeps the same level of production.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M948232

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