Suppose Sarah opens a lemonade stand. She hires Aisha and Sadeem for $12 a week ($6 each). She “rents” pitchers and spoons from her friend mother for $5 a week and spend $20 a week on paper cups, lemons, sugar, and other materials. Before she opened the stand, she was earning $15 a week selling newspapers. She grosses $72 in revenues a week from lemonade sales. Calculate accounting costs, economic costs, accounting profit, and economic profit. Evaluate how Sarah’s lemonade business is doing.
Accounting costs = 12+5+20=$37; Economic costs = 12+5+20+15=$52; Accounting profit = 72-37=$35; Economic profit = 72-52=$20. I think, Sarah’s business is profitable and cost effective, so it is necessary to continue because it also brings economic benefits for her.