Question

An individual leaves a college​ faculty, where she was earning ​$60,000 a​ year, to begin a new venture. She invests her savings of ​$45,000​, which were earning 6 percent annually. She then spends ​$25,000 renting office​ equipment, hires two students at ​$22,000 a year​ each, rents office space for ​$12,000​, and has other variable expenses of ​$40,000. At the end of the​ year, her revenues are ​$200,000.

(a) What are her accounting profits for the year?
(b) What are her economic profits for the year?

Answer 1

(a) What are her accounting profits for the year?

Accounting profits =79000

(b) What are her economic profits for the year?

Economic profits=16300

Step-by-step explanation:

Accounting profits =total revenues (200000) -total explicit costs of all inputs =25000+40000+(2x22000)+12000)

Accounting profits =200000-121000

Accounting profits =79000

Economic profits =total revenues-total opportunity cost of all inputs used - (explicit + implicit costs).

$200000-(121000+60000+(45000*6%)=

Economic profits=16300