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:

A. Average accounting cost is $125 ($50 + $75), hence Average Accounting Profit is $11,875 ( $12000 - $125). This is because Accounting profit does not take into account the opportunity cost.

B. Unlike Accounting Profit, Economic or if it takes into account the opportunity cost, that is the forgive alternative.

The total economic cost of Barney is $10,425 ($10,000+$300+75+50) which represent his previous wages as a corporate an accountant, the opportunity cost of using his garage as office, his office equipment purchase and electricity bill payment respectively.

Hence Economic Profit is $1575 ($12000- $10425)

Explanation: