Syed Sarim Bin Shakir

ASSIGNMENT 1

a. What will be business and economic profit?

Business Profit = Total Revenue – Total Explicit Cost (Business Cost)

= Revenue – ( Rent + Supplies + Hired Help + Utilities + Interest on Loan)
= $200000 – ( $10000 + $80000 + $40000 + + $5000 + (80000 * 0.1))
= $200000 – $143000
= $57000
Economic Profit = Business Profit – Implicit Cost
= $57000 - $40000
= $17000
Salary as Manager > Profit from Pharmacy. Hence, Samantha should not purchase
the pharmacy.
b. If revenue will be equal to economic cost (Implicit + Explicit Cost) than economic
profit will be zero
Economic Cost = $143000 + $40000
= $183000
Revenue for one year would be $183000
Revenue for three years would be $183000 * 3 = $549000

c. As in the given case, Samantha has no rival/competitor for first three years, So
she would benefit from the first mover's advantage and also implicate monopoly
theory of Profit for the profit earned during three years.

d. Total Amount Samantha would Get:

= Total Investment + 15% return on investment - $50000
= $100000 + ($100000 * 0.15) - $50000
=$115000 - $50000
= $65000
Smanatha Should not buy this pharmacy as she can she can easily get the job of
manager for $40000 per year as she could earn $120000 for three years, whereas
profit earned through pharmacy is less than his earning through manager job.
Moreover, she has to pay the loan amount $80000 as well.