Question

Fred quits his job with a big accounting firm, where he was earning $95,000 per year, to start his own accounting business in a building he owns. He previously rented the building to someone who paid him rent of $22,000 per year, but now Fred collects no rent because he is using the building himself. Fred pays himself a salary of $32,000 per year and has other expenses of $25,000 per year. The yearly economic cost for Fred's accounting business is _______

Answer 1

Answer:

The yearly economic cost for Fred's accounting business is $142,000.

Explanation:

Economic costs include both the explicit costs and the implicit costs.

Explicit costs are the expenditure on factors of production purchased from outsiders.

Implicit costs are the opportunity cost of owner provided resources.

Other expense is an explicit cost.

Foregone salary and foregone rent are the implicit costs.

So,

Economic cost = Foregone salary + Foregone rent + Other expenses

Economic cost = $95,000 + $22,000 + $25,000 = $142,000

Thus,