Economics Problem Set 7

2. John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: Labor $2,000 Food and drink 500 Electricity 100 Vehicle lease 150 Rent 500 Interest on loan for equipment 1,000 a. Calculate John’s annual accounting profit. b. John could earn $1,000 per year as a recycler of aluminum cans. However, 
he prefers to run the café. In fact, he would be willing to pay up to $275 per year to run the café rather than to recycle. Is the café making an economic profit? Should John stay in the café business? Explain. c. Suppose the café’s revenues and expenses remain the same, but recyclers’ earnings rise to $1,100 per year. Is the café still making an economic profit? Explain. d. Suppose John had not had to get a $10,000 loan at an annual interest rate of 10 percent to buy equipment, but instead had invested $10,000 of his own money in equipment. How would your answer to parts a and b change? e. If John can earn $1,000 a year as a recycler, and he likes recycling just as well as running the café, how much additional revenue would the café have to collect each year to earn a normal profit?