Question

As a server you earn $30000 per year, including tips. Someone offers you a new job as an economic consultant, which pays $100,000 per year. To be a consultant, you’ll need to rent an office, purchase supplies, and buy new computer equipment. Which of the following can we conclude?
(A) If the explicit cost for the consulting job is $20,000 per year, your economic profit is equal to $80,000.
(B) If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $45000.
(C) If the explicit cost for the consulting job is $30,000 per year, your accounting profit is equal to $40000.
(D) If the explicit cost for the consulting job is $20,000 per year, your accounting profitis equal to $50000.

Answer 1

Answer:

(B) If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $45000.

Explanation:

Economic profit is obtained by substracting explicit (monetary) costs, and implicit (opportunity) costs, from total earnings.

In this case, the earnings for working as an economic consultant are $100,000. The implicit, opportunity cost is the $30,000 that are given up because of quitting the serving job. If the explicit cost of renting an office, purchasing supplies and buying a computer is $25,000, then, we have the following equation:

Economic profit = earnings - explicit costs - implicit costs

                          = $100,000 - $25,000 - $30,000

                          = $45,000