Answer:
The correct answer is:
In his first year, Frank had an accounting profit of <u>$6,500</u> and an economic profit of <u>$10,000</u>.
Explanation:
First of all, it is important to note that Frank made a profit at the end of the first year because if 6 clients paid him $10,000 each, his overall income for the year will be $60,000, which is greater than the amount of $50,000 that his former job was paying him.
Accounting profit is the difference between the monetary value of the revenue received and the explicit and implicit costs. Explicit and implicit costs include, cost of purchasing materials/assets, wages to workers etc. In this it is calculated thus:
Revenue received = $60,000
Costs of materials/activities = $2,500 (laptop and printer) + $1,000 (expenses = $3,500
Hence the net accounting revenue received = 60,000 - 3,500 = 56,500.
Therefore, accounting profit = 56,500 - 50,000 (old income) = $6,500
While economic profit is the total value of both monetary and asset values. Hence the economic profit is:
= 60,000 (new income) - 50,000 (old income) = $10,000.
