Peggy-Sue makes awesome cookies. They almost violate the law of diminishing marginal utility – they are so good, you want more and more. So she became an entrepreneur and owns her own business selling cookies.

Three years ago, she borrowed $100,000 from a bank and spent it all during the first year on a cooky-making oven and supplies. She could now sell for the oven for $40,000 if she shut down the business. She has paid back the loan, and the oven is no longer depreciating in value.

She sells 520,000 cookies per year at 50c each.

Her annual explicit expenses are:

$30,000 labor – one employee.

$35,000 rental for the store.

$20,000 ingredients (don’t ask what they are – it’s a secret!)

$ 5,000 utilities (electricity, water, gas, phones, and Internet services)

Here’s the problem:

The Cookie Monster company has offered to hire Peggy-Sue at $125,000 per year, with a lifetime contract as long as she wants to work there.

If she accepted, she could invest the funds from selling the firm to get 10% interest.

Peggy-Sue is only interested in how much money she can earn. She is otherwise indifferent between being an employee or owning her business.

Her problem is that she can’t figure out whether to stick with her own firm, or sell it and work for the Cookie Monster. She has no clue about what “economic profit” is.

Alas! Peggy-Sue never took any economics course. But – she heard you are taking Foldvary’s econ 1 course at SCU, so knows you are econ-savvy, and she wants your economic advice. Should she stay in her own business, or sell it and work for Cookie-Monster?

a) 2 pts. Calculate her accounting profit.

For full credit, show how you calculate it.

b) 6 pts. Calculate her economic profit. Show how you calculate it.

c) 2 pts. Advise her what to do, keep her firm, or sell it and join Cookie Monster.
Don’t be a two-handed economist!
She doesn’t want to hear "on the one hand, on the other hand…"
She wants you to advise her either yes or no, not maybe, not "it depends."

a. 170k: she makes 260k per year from selling cookies, has 90k in expenses, so total of 170k in accounting profit per year.

b. -10k: 3 years of 170k accounting profit is 510k, plus the 40k for selling the oven is 550k. 10% interest on that is 55k, add the 125k offered by cookie monster and that’s 180k. so her economic profit is -10k (the 170k she’s making minus the 180k she could potentially make).

c. sell it

I will share some too. These are by a mystic Philosopher, Poet, Lover and Warrior "Hazrat Ali"

The mind of a wise man is the safest custody of secrets; cheerfulness is the key to friendship; patience and forbearance will conceal many defects.

He who is deserted by friends and relatives will often find help and sympathy from strangers.

Our affairs are attached to the destiny decreed by God, even our best plans may lead us to destruction.

Every person who is tempted to go astray, does not deserve punishment.

One who rushes madly after inordinate desire, runs the risk of encountering destruction and death.

The best form of devotion to the service of God is not to make a show of it.

Contentment is the capital which will never diminish

Like your body your mind also gets tired so refresh it by wise sayings.

That knowledge which remains only on your tongue is very superficial. The intrinsic value of knowledge is that you act upon it.

Loving one another is half of wisdom.

Aid (from God) is in proportion to the trouble.

Thanks so much for sharing. Peace, Love and Blessings!

Everything is God’s, we are only the Trustees. World is not for our consumption, it must be dedicated Him. He resides in every being and hence everyone is potentially godly and we must treat that way – with love and respect.All that exist – animate and inanimate – is connected and what flows in this connection is love, each one is being for the other and in that way everyone is in peace and joy. We must discover/experience the divinity in us and it s connection to all being, connection between my self and the Universal self, atma with paramatma. So says the Upanishads, in particular, Isha Upanishad.