Question

An individual leaves a collegeâ faculty, where she was earning â$80,000 aâ year, to begin a new venture. She invests her savings of â$38,000â, which were earning 6 percent annually. She then spends â$22,000 renting officeâ equipment, hires two students at â$24,000 a yearâ each, rents office space for â$9,000â, and has other variable expenses of â$42,000. At the end of theâ year, her revenues are â$200,000. Her accounting profit is â$79,00079,000. Her economic profit is â___________

Answer 1

Answer:

See below

Explanation:

a. Accounting profit

= Total revenues - Total explicit costs of all input

Given that;

Total revenues = $200,000

Total explicit costs of all inputs = [$22,000 + $42,000 + (2 × $24,000) + $9,000]

= $22,000 + $42,000 + $48,000 + $9,000

= $121,000

Accounting profit = $220,000 - $121,000

Accounting profit = $99,000

b. Economic profit

= Total revenues - Total opportunity Costa of all inputs used - (Explicit + Implicit cost)

Given that;

Total revenues = $200,000

Total opportunity cost of all inputs used = $121,000

Explicit cost + Implicit cost = $80,000 + ($38,000 × 6%)

Economic profit = $200,000 - ($121,000 + $80,000 + ($38,000 × 6%)

Economic profit = $200,000 - $203,280 = $3,280