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 costs.

Answer 1

Answer: The answer is as  follows:

Explanation:

Walter paid for supplies = $25,000 ⇒ This is a component of accounting cost

He also pays 3% interest to his uncle on the loan of $30000 = $30000 \times\frac{3}{100}$

= $900

So, the total accounting cost according to Tyler the accountant:

= 25000 + 900

= $25900

Now, as per Greg the economist:

Explicit Cost = $25900

Implicit cost : If walter would not be a painting business then he would have been working as a high school teacher for $40000 per year and interest on savings account that is $600.

∴ Economic cost according to Greg = Explicit cost + Implicit Cost

= 25900 + 40000 + 600

= 66500

Answer 2

Answer:

According to Tyler the accountant the costs are $25,900 and Greg says the costs are $66,500.

Explanation:

COST AS PER TYLER -

According to Tyler( accountant) , Walters accounting cost will include the expenses which have been incurred on the painting business, so it will include the expenses paid by Walter on supplies and the interest he pays to his uncle.

Accounting cost = $25,000 + $30,000 x 3%

                           = $25,000 + $900

                           = $25,900

COST AS PER GREG -

According to Greg (economist) , Walters economic cost will include both the explicit cost and implicit cost. The explicit cost is $25,900 and the implicit cost is the opportunity cost which will include the interest that Walter could have earned on savings account and the salary as a teacher.

Economic cost = $25,900 + $40,000 + $20,000 x 3%

                         = $25,900 + $40,000 + $600

                         = $66,500