Question

An individual leaves a college faculty, where she was earning $45,000 a year, to begin a new venture. She invests her savings of $10,000, which were earning 10 percent annually. She then spends $22,000 renting office equipment, hires two students at $30,000 a year each, rents office space for $14,000 and has other variable expenses of $38,000. At the end of the year, her revenues are $220,000. (4 points) A. What are her accounting profits for the year? B. What are her economic profits for the year? (Be sure and show your work for both questions)

Answer 1

a). Her accounting profits=$86,000

b). Her economic profit=$41,000

Step-by-step explanation:

a). Accounting profit

The accounting profit can be described as the difference between the monetary revenue and the monetary expenses. This can be expressed as;

P=R-E

where;

P=accounting profits

R=monetary revenue

E=monetary costs/expenses

In our case;

Monetary revenue=$220,000

Monetary costs=22,000+(30,000×2)+14,000+38,000=134,000

replacing;

P=(220,000-134,000)=$86,000

Her accounting profits=$86,000

b). Economic profits

The economic profits include the opportunity costs. Economic profits can be expressed as:

Economic profit=Accounting profit-opportunity cost

where;

Accounting profit=$86,000

opportunity cost= $45,000

replacing;

Economic profit=(86,000-45,000)=$41,000

Economic profit=$41,000