Question

Andreas is a political consultant with his own firm. he travels the country and provides campaign advice for political candidates. last year he earned $250,000 in revenue for his services. he pays one employee $50,000 to manage the small office back home and pays $30,000 on rent and utilities for that office. his accountant tells him that if he were to sell all of the equipment, he could put that money in the bank and earn $3,000 in interest next year. bill also has received an offer to teach political science at a college at a salary of $100,000. bill's accounting profit is equal to _____ and his economic profit is equal to _____.

Answer 1

Bills accounting profit is equals to revenue ($250,000) minus explicit (monetary) cost (50,000 and 30,000), while his economic profit is equals to accounting profit minus implicit (opportunity) cost (3,000 and 100,000). Accounting profit is $170,000 and Economic profit is $67,000.

Economic profit is always lower than accounting profit because explicit costs and implicit costs are both deducted to revenue. Implicit costs are cost that he should have earned if he gives up his present resources. These costs are projected cost and are not yet incurred.