Posted by Ed on Tuesday, July 24, 2007 at 9:27pm.
1)The Midnight hour, a local
nightclub, earned $100,000 in
accounting profit last year. This
year the owner, who had invested $ 1
million in the club, decided to
close the club. What can you say
about economic profit (and the rate
of return)in the nightclub business?
Economic Profit = TR(total revenue)-
TC(total economic cost)
EP = $100,000 - $1,000,000
EP = -$900,000
Since EP is a negative number the
firm should shut down, the output is
not positive, therefore the company
operates at a loss, the manager
needs to determine how long they
want to continue with this loss
Does this sound like the correct
Certainly the owner didn't expect to make a million dollars the first year the club was in existence.
If the club continues to increase its revenues, then the owner would be better served for the club to stay in business and increase its profits each year.
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