Question

Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20,000 from her savings, (which paid 3 percent interest) and borrowed $30,000 from her uncle, whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She asked Louis the accountant and Greg the economist to calculate her profit for her.a)Louis says her profit is $34,100 and Greg says her profit is $6,500b)Louis says her profit is $34,100 and Greg says she lost $6,500c)Louis says her profit is $35,000 and Greg says she lost $5,000d)Louis says her profit is $33,500 and Greg says her profit is $33,500

Answer 1

Correct option is (b)

Step-by-step explanation:

An accountant would just deduct cost from revenue to arrive at the profit. An economist, on the other hand, would include the opportunity cost as well in addition to usual costs as that is the real estimate of a business's position.

As per Louis the accountant, following are the cost incurred by Dolores:

Interest paid to uncle = 0.03 × 30,000 = $900

Cost of ingredients = $25,000

Total cost = 25,000 + 900 = $25,900

Revenue = $60,000

Profit = Revenue - Cost

= 60,000 - 25,900

= $34,100

As per Louis, Dolores earned profit of $34,100

As per Greg, the economist, opportunity cost of starting new business are:

Salary as a teacher = $40,000

Savings that yielded 0.03 percent interest. So, she lost interest of 0.03 × 20,000 that is $600

Total opportunity cost = $40,600

Usual cost = 25,900

Total cost = $66,500

Revenue = $60,000

Her cost is exceeding revenue by $6,500 (66,500 - 60,000). So, as per Greg, she lost $6,500.