Question

Economan has been infected by the free enterprise bug. He sets up a firm on extraterrestrial affairs. The rent of the building is $4,000, the cost of the two secretaries is $40,000, and the cost of electricity and gas comes to $5,000. There's a great demand for his information, and his total revenue amounts to $100,000. By working in the firm, though, Economan forfeits the $50,000 he could earn by working for the Friendly Space Agency and the $4,000 he could have earned as interest had he saved his funds instead of putting them in his business.

a) What is the profit o loss by an accountant's definitions?


b) What is profit or loss by an economist's definitions?

Answer 1

Accounting profit for Economan's firm is $51,000, calculated by subtracting explicit costs from total revenue. Economic profit, accounting for both explicit and implicit costs, results in a loss of $3,000, indicating that when opportunity costs are considered, the firm is not profitable.

Step-by-step explanation:

When examining Economan's venture into an extraterrestrial affairs firm, the calculation of profit or loss comes in two forms: accounting profit and economic profit.

Accounting Profit

Accounting profit is the total revenue minus explicit costs, which are the direct costs of operating the business. So, the calculation would be:

• Total revenue: $100,000
• Explicit costs (Rent + Secretaries + Utilities): $4,000 + $40,000 + $5,000 = $49,000
• Accounting profit: $100,000 - $49,000 = $51,000

Economic Profit

Economic profit takes into consideration both explicit and implicit costs. Implicit costs are the opportunity costs of not pursuing the next best alternative with your resources. Therefore, we calculate Economan's economic profit as follows:

• Accounting profit: $51,000
• Implicit costs (Foregone salary + Foregone interest): $50,000 + $4,000 = $54,000
• Economic profit: $51,000 - $54,000 = -$3,000 (a loss)

By this calculation, Economan is enduring an economic loss despite an accounting profit because when all costs are considered, the firm is not covering its opportunity costs.

Answer 2

accounting profit 51,000

economic loss 3,000

Step-by-step explanation:

the accounting profit will consider only the explicit cost

revenue 100,000

rent expense (4,000)

salaries expense (40,000)

utilities expense (5,000)

net income 51,000

while, economic profit will consider the opportunity cost of each factor too.

accounting income 51,000

opportunity cost for wages factor (50,000)

opportunity cost for capital facotr (4,000)

economic loss (3,000)