Josie's Tacos has been operating continuously since 1972. Her original investment was $100

000, but the business is worth much more today. In fact, Josie's main competitor, Tacos R Us,

has offered to buy her out for $1 million any time Josie wants to sell. Tacos R Us would also like

to hire Josie for $50 000 a year if she sells out. Josie has been tempted because she figures that

she could earn 10% on $1 million if she invests wisely. You need to help her decide what to do.

Currently Josie figures that she is earning a profit of $100 000 per year based on the following

information:

Total sales revenue: $200 000 from 100 000 tacos @ $2 each

Total money outlays: $100 000 for wages, materials and utilities

a.

Compute Josie's total explicit and total implicit costs.

b.

What is Josie's accounting profit or loss? What is her economic profit or loss? Would you

advise her to stay in business or to sell out to Tacos R Us?

c.

Would the decision to stay in business or sell out change if Josie had inherited the business

in 1972 from her uncle and therefore had no money of her own invested in the business?

Explain.

d.

Suppose that, instead of owning the business free and clear, Josie owes $1 million to a bank

on a loan used to finance the business. The interest payments on this loan are $100 000 per

year. Would this change the amount of accounting profit or loss and economic profit or loss

you reported in part (b)? Would it change her decision to continue in business or to sell

out? Explain.