Question

Chris owns his own business restoring antique cars. Last year, he restored 24 cars, which he sold for $1,100,000. The parts and supplies necessary for the restoration totaled $400,000. He paid $360,000 to his six employees and a salary of $110,000 to himself. The rent and utilities on his building were $80,000. Recently, Chris received an offer to work as Jay Leno’s personal auto restorer, at a salary of $275,000. Chris also received a $180,000 offer to host a car-related reality TV show for the Discovery Channel. Chris can only work one job.
1. What is Chris's accounting cost?
a. $950,000.
b. $1,115,000.
c. $760,000.
d. $840,000.
What is his accounting profit?
a. $15,000.
b. $260,000.
c. $340,000.
d. -$150,000. .
2. What is Chris's economic cost?
a. $1,115,000.
b. $345,000.
c. $165,000.
d. $950,000.
What is his economic profit?
a. $755,000.
b. $935,000.
c. $150,000.
d. -$15,000.
3. Comparing what Chris earns in his current job—both his salary and his company's accounting profit—with his best outside offer, you can conclude that economic profits and losses show:_____.
a. how much an individual would earn in the individual's next best alternative minus how much he or she currently earns?
b. how much an individual currently earns minus how much the individual would earn in his or her next best alternative?

Answer 1

Answer:

1. a. $950,000.
2. $150,000.
3. a. $1,115,000.
4. d. -$15,000.
5. b. how much an individual currently earns minus how much the individual would earn in his or her next best alternative.

Explanation:

1. Chris's accounting cost

The accounting cost is the explicit cost of the business. The normal costs so to speak;

= Parts and supplies necessary for the restoration + Salaries to employees + Salary to himself + Rent and utilities

= 400,000 + 360,000 + 110,000 + 80,000

= $‭950,000‬

2. Chris's accounting profit

= Revenue - Accounting cost

= 1,100,000 - 950,000

= $150,000

3. Chris's economic cost

These are explicit + implicit (opportunity) cost.

The opportunity cost is the next best alternative which would have been the $275,000 if he had worked at Jay Leno’s personal auto restorer.

He would therefore forfeit the salary he earns now of $110,000.

= Accounting cost + Salary foregone - Salary

= 950,000 + 275,000  - 110,000

= $1,115,000

4. Chris's economic profit

= 1,100,000 - 1,115,000

= -$15,000

5. b. how much an individual currently earns minus how much the individual would earn in his or her next best alternative.