Question

Suppose Winston's annual salary as an accountant is $60,000, and his financial assets generate $4,000 per year in interest. One day, after deciding to be his own boss, he quits his job and uses his financial assets to establish a consulting business, which he runs out of his home. To run the business, he outlays $8,000 in cash to cover all the costs involved with running the business, and earns revenues of $150,000. Did Winston make a good decision? Support your answer by showing your calculations and explain your answer with economic terms.

Answer 1

Winston took a very good decision.

Step-by-step explanation:

If Winston is making economic profit then the decision is good

Economic profit=Total revenue-implicit cost - explicit costs

where,

implicit cost= opportunity cost of best alternative and explicit cost is accounting costs

=150000-(60000+4000)-8000

=78.000

The economic profit is positive, a good indicator that Winston took a good decision.