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.

Answer 1

Answer:

Accounting Profit = $11,875

Economic Profit = $1,575

Explanation:

income from job = $10,000 /month

Rent which could have been earned = $300 /month

Office supplies = $75 /month

Increase in electricity bills = $50 /month

Income from home = $12,000 /month

(a) Accounting profit = Income - Costs

                                  = $12,000 - ($75 + $50)

                                  = $11,875

(b) Economic profit = Accounting profit - Opportunity cost

                                = $11,875 - ($10,000 + $300)

                                = $1,575