When the price of Starbucks coffee increased by 8 percent, the quantity demanded of Peet’s coffee increased by 10 percent.
September 3, 2020
Let’s say that a clothing retailer currently oers a very strict return policy.
September 3, 2020

1. Dane decides to give up a job earning $200,000 per year as a corporate lawyer and converts a

duplex he owns into a UFO museum. The market rent for a similar duplex is $20,000 a year. He

pays wages of $75,000 a year to his assistants and $10,000 a year for utilities. Fans flock to the

museum to see his collection of extraterrestrial paraphernalia. Over the course of the year, the

museum brings in revenues of $200,000.

Use the information above to answer the following questions. [Hint: ignore that value of Dane’s

extraterrestrial paraphernalia]

a. Calculate Dane’s accounting profits [5 points]

b. Calculate Dane’s economic profits [5 points]

c. Based on the performance of the museum in this one year, should Dane have quit his job as

a corporate lawyer? Briefly explain why or why not. [5 points]

2. Suppose an assistant professor of economics is earning a salary of $75,000 per year. One day,

she quits her job, sells $100,000 worth of bonds that had been earning her 3 percent per year,

and uses the funds to open a bookstore. At the end of the year, she shows an accounting profit

of $80,000. What is her economic profit? [show all your work] [5 points]

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