John Jones owns and manages a cafe 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 cafe. In fact, he would be willing to pay up to $275 per year to run the cafe rather than to recycle. Is the cafe making an economic profit? Should John stay in the cafe business? Explain.