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.
a) Tyler says his costs are $25,900, and Greg says his costs are $66,500.
b) Tyler says his costs are $25,000, and Greg says his costs are $65,000.
c) Tyler says his costs are $66,500, and Greg says his costs are $66,500.
d) Tyler says his costs are $75,000, and Greg says his costs are $41,500.

Answer 1

Answer:

Option A is correct.

Tyler says his costs are $25,900, and Greg says his costs are $66,500.

Explanation:

We know accounting cost is the expenditure made on ingredients by the company which is, $25000 that Walter paid for supplies last year. Walter also paid 3 % interest to his uncle,

Interest to the uncle is = (30000*3)/ 100

Interest to the uncle is = $900

Thus total accounting cost that an accountant quotes equal to, 25000 + 900 = $25,900

According to the economist explicit cost is $25900. We also include implicit cost in it. If Walter would not be a business then he would be earning $40000 as teacher and $600 interest from savings bank account. Thus his economic cost according to economist would be, = 25900 + 40000 + 600

Cost according to the economist = $66,500