Question

Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year, to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and explicit costs were $10,000.
a. Calculate Ernie's accounting profit.


b. Calculate Ernie's economic profit.

Answer 1

a) Ernie's accounting profit is $40,500.

b) Ernies economic profit is $10,500, excluding the salary forgone (opportunity cost) from the accounting profit.

What is the difference between accounting profit and economic profit?

The difference between accounting profit and economic profit is that accounting profit does not consider the opportunity costs, which economic profit factors in.

Accounting profit is narrower in concept than economic profit.  It is simply revenue minus total costs without opportunity cost.

Economic profit, on the other hand, includes the opportunity costs in the total costs.

Data and Calculations:

Salary per year at P.E.T.S = $30,000

Annual interest from savings = $500 ($10,000 x 5%)

Revenue in the new business = $50,000

Explicit costs = $10,000

Accounting profit = $40,500 ($50,500 - $10,000)

Economic profit = $10,500 ($50,500 - $10,000 - $30,000)

Thus, Ernie's accounting profit is $40,500 and the economic profit is $10,500.

Learn more about accounting profit and economic profit at brainly.com/question/27113609

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