Is Opening an Amulet Store a Good Idea for Buffy?

a. What is opportunity cost?

b. What is Buffy's opportunity cost of running the store for a year?

c. What would her accountant consider the store’s profit?

d. Should Buffy open the store? Explain.

e. How much revenue would the store need to generate for Buffy to earn positive economic profit?

Opportunity cost refers to the value of the next best alternative.

Opportunity cost: Opportunity cost is the value of the next best alternative that is sacrificed when making a choice. It represents the benefits or profits that could have been gained from the alternative option.

Buffy's opportunity cost: Buffy's opportunity cost of running the store for a year would be her $80,000 per year salary as a vampire hunter.

Store's profit: Buffy's accountant would consider the store's profit to be the revenue generated from selling amulets, which in this case is $400,000. However, this does not take into account the expenses and opportunity cost.

Should Buffy open the store: To determine whether Buffy should open the store, she needs to compare the total costs (rent, merchandise, and the opportunity cost of her job) with the potential revenue. If the revenue exceeds the total costs, it may be profitable for her to open the store.

Revenue for positive economic profit: To earn positive economic profit, the revenue generated by the store would need to cover all the explicit costs (rent and merchandise) as well as the implicit cost of the opportunity foregone (Buffy's $80,000 salary as a vampire hunter).