Question

Madeline quits her job, at which she was earning $20,000 per year. She then takes $50,000 out of savings, on which she was earning 10% interest, and uses it to buy supplies for her business. She also pays $10,000 in rent on the building and $15,000 in additional labor costs. In her first year of operations, Madeline receives $150,000 in revenue from sales.
Find:
A. Madeline's accounting cost is:_____.
B. Madeline's economic cost is:_____.
C. Madeline's accounting profit is:______.
D. Madeline's economic profit is:______.

Answer 1

Answer:

A. Madeline's accounting cost is $75,000

B. Madeline's economic cost is $100,000

C. Madeline's accounting profit is $75,000

D. Madeline's economic profit is is $50,000

Explanation:

A. To calculate Madeline's accounting cost we would have to make the following calculation:

Madeline's accounting cost=cost of supplies+rent+labour costs

Madeline's accounting cost=$50,000+$10,000+$15,000

Madeline's accounting cost=$75,000

B. To calculate Madeline's economic cost we would have to make the following calculation:

Madeline's economic cost=explicit cost+implicit cost

=$75,000+opportunity cost

=$75,000+0.10*$50,000+earning job

=$75,000+$5,000+$20,000

=$100,000

C. To calculate Madeline's accounting profit we would have to make the following calculation:

Madeline's accounting profit=revenue-accounting cost

=$150,000-$75,000

=$75,000

D. To calculate Madeline's economic profit we would have to make the following calculation:

Madeline's economic profit=revenue-economic profits

=$150,000-$100,000

=$50,000