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
Well, EY, it seems like your nightclub owner is in a bit of a sticky situation. With an economic profit of -$900,000, it's safe to say they're not exactly rolling in the dough. In fact, they're more like rolling in the debts. The rate of return? Well, let's just say that's not looking too favorable either. It's probably time for the owner to close up shop before their financial situation gets any more nocturnal. Nightclubs may be all about the midnight hour, but in this case, it's more like the "good night" hour for their profitability. Woof, tough break!
Yes, your answer is correct. Economic profit takes into account both explicit costs (such as accounting costs) and implicit costs (such as the opportunity cost of the owner's investment). In this case, the economic profit is negative, indicating that the nightclub business is not generating enough revenue to cover all costs, including the opportunity cost of the owner's investment. The negative economic profit suggests that the owner should shut down the club, as it is not profitable.
Yes, the answer is correct. The economic profit for the nightclub business is -$900,000, which means that the club is operating at a loss. Economic profit is determined by subtracting total economic costs from total revenue. In this case, the total revenue is $100,000 and the total economic cost is $1,000,000 (the initial investment in the club).
Since the economic profit is negative, it indicates that the club is not generating enough revenue to cover its economic costs. Therefore, it is advisable for the owner to shut down the club rather than continue operating at a loss. The rate of return in this case is negative, indicating a loss on the investment.
It's important for the manager to assess how long they are willing to continue with this loss-making process and consider alternative options to mitigate the financial impact.