Question

Barney decides to quit his job as a corporate accountant (which pays $10,000 a month) and go into business for himself as a certified public accountant. He decides not to rent office space downtown, but instead sets up shop in his converted garage apartment, which he could rent out for $300 a month if he wasn't using it as his own office. He must purchase office supplies worth $75 a month, and his monthly electricity bill has increased by $50 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $12,000 per month.a. What are Barney's average monthly accounting profits?b. What are Barney's average monthly economic profits?

Answer 1

Answer:

$11,875; $1,575

Explanation:

Total cost of starting an own business is as follows:

= purchase office supplies + monthly electricity bill has increased

= $75 + $50

= $125 per month

Total revenue = $12,000 per month

Opportunity cost refers to the cost of forgone something in order to choose some other alternative.

Opportunity cost or Implicit costs:

= Earning from Job + Income from garage apartment

= $10,000 + $300

= $10,300

(a) Barney's average monthly accounting profits:

= Total revenue - Total cost

= $12,000 - $125

= $11,875

(b) Barney's average monthly economic profits:

= Accounting profits - Implicit cost or Opportunity cost

= $11,875 - $10,300

= $1,575