Question

Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. to invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. last year walter paid $25,000 for supplies and had revenue of $60,000. walter asked tyler the accountant and greg the economist to calculate his painting business's profit.
a. tyler says his profit is $34,100, and greg says his profit is $34,100.

b. tyler says his profit is $25,900, and greg says his profit is $66,500.

c. tyler says his profit is $35,000, and greg says he lost $5,900.

d. tyler says his profit is $34,100, and greg says he lost $6,500.

Answer 1

d. tyler says his profit is $34,100, and greg says he lost $6,500.

Accounting profit is simply revenues minus explicit (direct) costs whereas economic profit factors in opportunity costs and explicit costs.

Answer 2

Answer:

D) tyler says his profit is $34,100, and greg says he lost $6,500.

Explanation:

Walter's accounting profit = total revenues - total accounting costs = $60,000 - $25,000 - ($30,000 x 3%) = $60,000 - $25,000 - $900 = $34,100

Walter's economic profit = accounting profit - opportunity costs

opportunity costs are the money lost for choosing one investment over another

Walter's opportunity costs = ($20,000 x 3%) + $40,000 = $600 + $40,000 = $40,600

Walter's economic profit = $34,100 - $40,600 = -$6,500