Question

QUIZLET Ernesto owns a house painting company. Total sales for the past year were $75,000. His bills for running the business were $30,000. Stan, who owns a furniture-making company, previously asked Ernesto to come work for him at a salary of $40,000. Ernesto's accounting profit is $ and his economic profit is

Answer 1

Answer:

• Accounting profit = $45,000
• Economic profit = $5,000

Explanation:

Accounting Profit = Revenue - Explicit costs

= 75,000 - 30,000

= $45,000

Economic profit on the other hand takes into account both the explicit (normal) costs as well as Implicit costs which are the opportunity costs. In this case the opportunity cost is the salary Ernesto would have earned if he had gone to work for Stan.

Economic profit = Revenue - Explicit costs - Implicit costs

= 75,000 - 30,000 - 40,000

= $5,000