Question

After graduation, you face a choice. you can work for a multinational consulting firm and earn a starting salary (benefits included) of $40,000, or you can start your own consulting firm using $5,000 of your savings, which you otherwise would have earned an interest return of 7 percent on. you choose to start your own consulting firm. at the end of the first year, you add up all of your expenses and revenues. your expenses include $14,000 in rent, $1,000 in office supplies, $24,000 for office staff, and $4,500 in telephone expenses. after operating your consulting firm for a year, your total revenues are $88,000. instructions: enter your answers as whole numbers.
a. calculate your accounting profit. $
b. calculate your economic profit.

Answer 1

Answer: Accounting profit= $44,500

Economic Profit = $4,150

Explanation: Accounting profit are the profit earned by subtracting explicit cost from the total revenue earned.

$Accounting profit = Revenue - Explicit cost$

Economic profit are profits lefts out after subtracting implicit (opportunity) cost and explicit ( monetary) costs. It is given by

$Economic profit = Revenue - Explicit cost - Implicit Cost$

In this case, the explicit cost include rental cost, office supplies, office staff and telephone expenses.

While, implicit cost include the 7% interest foregone on the $5000 savings and the salary foregone ($40,000) by choosing to startup a business than take up the job.