Question

What is Jared's accounting profit? Suppose Jared could have used his talents to run a similar kind of business instead. If he values his entrepreneurial skill at $10,000 annually, find Jared's total implicit costs. What was Jared's economic profit last year?

Answer 1

Answer:

Explanation:

I think your question is missed of key information, allow me to add in and hope it will fit the original one.  

After working as a head chef for years, Jared gave up his $60,000 salary to open his own restaurant last year. He withdrew $50,000 of his own savings that had been earning 4% interest and borrowed another $100,000 from the bank at a rate of 5%. As the restaurant space he was leasing had no separate office, Jared converted his basement apartment into office space. He had previously rented the apartment to a student for $300/month. The following table summarizes his operations for the past year.

Total sales revenue    $590,000      

 Employee wages $120,000  

 Materials                 $350,000  

 Interest on loan $5,000  

 Utilities                 $10,000  

 Rent                 $25,000  

Total explicit costs              $510,000

a, What is Jared's accounting profit?

b, Suppose Jared could have used his talents to run a similar kind of business instead. If he values his entrepreneurial skill at $10,000 annually, find Jared's total implicit costs.

c, What was Jared's economic profit last year?

My answer:

a. , What is Jared's accounting profit?

As we know that accounting profit is the difference between total sales revenue and Total explicit cost, from the table we can find that:

$590,000  - $510,000  = $80,000 is the accounting profit

b. Jared's total implicit costs.

Implicit costs include his foregone wages ($60,000), the value of his entrepreneurial skill ($10,000), foregone rent on the apartment ($3,600 = 12 x $300) plus the foregone interest on his savings ($2,000 = .04 x $50,000). These total $75,600.

c. What was Jared's economic profit last year?

Explicit plus implicit, was $585,600 = $510,000 + $75,600. His economic profit is the difference between revenue and economic cost, or $4,400 (= $590,000 – $585,600).