Answer to Question #194079 in Economics for Justin

Question

Khalid used to be a DJ earning R500 000 a year, but he now works as a plumber. Each year, his direct costs are R185 000. This includes the annual electricity, water and levy bill of R82 000, and annual rent of R75 000. He has R120 000 of financial capital tied up in the business throughout the whole year, and the market interest rate is 8.5%. His annual revenue as a plumber is R900 000. Which of the following statements is correct?

[1] Khalid is breaking even.

[2] Khalid is making economic profit of R95 000.

[3] Khalid is making economic profit of R204 800.

[4] Khalid is making economic loss of R62 000.

Answer 1

Economic profit is:

EP = 900,000 - 185,000 - (500,000 + 120,000×0.085) = 204,800.

So, the correct answer is [3].