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August 1, 2015

Homework Help: Managerial Economics Question

Posted by Ed on Thursday, July 26, 2007 at 8:50pm.

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?
ANSWER:
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
process.
Does this sound like the correct
answer?

Thanks,
EY

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