Question

Bob used to earn $40,000 per year in his job as a nurse, but he quit in order to open his own pizza shop. bob used $10,000 from his own savings account and borrowed $200,000 more from his bank. the interest rate is 4%. in bob’s first year of business he earned $80,000 in revenue and the cost of ingredients (flour, tomato sauce, cheese, etc.) was $67,000. for his first year of business, bob’s accounting profit was _______, and his economic profit was ______.

Answer 1

For his first year of business, Bob’s accounting profit was $5,000 (5,000 = 80,000-67,000-4%*200,000), and his economic loss was $35,000 (-35,000 = 5,000 - 40,000) based on the information shown on the question above. The accounting profit is a recorded profit based on every business transaction occurring in a one-year period. The economic profit (loss) is a difference between a revenue and its opportunity cost.