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Answer :
Pete's explicit costs total $180,000, and his implicit costs total $12,000. Pete's annual accounting profit is $133,000. His annual economic profit is $21,200.
Pete's economic profit value indicates that he is earning a positive return above his explicit and implicit costs, which suggests that he is effectively utilizing resources for his business.
In a monopolistically competitive industry with similar cost structures, in the long run, other firms will enter the market, leading to increased competition and reduced economic profit for individual firms.
Pete's explicit costs are the costs that require a direct monetary payment, such as rent and wages. In this case, his explicit costs total $60,000 (rent) + $120,000 (wages) = $180,000.
His implicit costs represent the opportunity cost of his own capital investment, which is the interest that he could have earned on his savings. At a 4 percent interest rate, his implicit costs amount to $30,000 x 4% = $1,200 per year.
Therefore, his implicit costs total $1,200 x 10 years = $12,000.
Pete's annual accounting profit is calculated by subtracting his explicit costs from his revenue: $325,000 - $180,000 = $145,000.
To calculate his economic profit, we deduct both explicit and implicit costs from his revenue: $325,000 - $180,000 - $12,000 = $133,000 (accounting profit) - $21,200 (implicit costs) = $111,800.
Pete's positive economic profit of $21,200 indicates that his business is generating a return above his explicit and implicit costs.
This suggests that Pete is effectively utilizing resources in his car repair shop, earning a surplus over what he could have earned from alternative uses of his capital.
It indicates that Pete's business is profitable and that he is making a positive economic contribution.
In a monopolistically competitive industry, firms have differentiated products, allowing them to have some market power. However, if other firms in the industry have similar cost structures as Pete's business, in the long run, new firms will enter the market attracted by the potential profits.
This increased competition will erode the economic profit of individual firms as consumers have more options to choose from. As new firms enter, the demand for existing firms' products will decrease, leading to a decrease in prices and profits.
Eventually, in the long run, the industry will reach a state of equilibrium where firms earn zero economic profit, with each firm producing at its minimum efficient scale.
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