Question

meera left her job as a public defender where she earned $204,000 per year. she calculates her entrepreneurial talent or forgone entrepreneurial income to be $24,000 a year. to open her own law firm, she cashed in $504,000 in bonds that earned 5 percent interest annually to buy out an existing firm. in the first year, the firm had 14,000 billable hours and charged $240 per hour. of the $240 per hour, $130 goes for employee wages and benefits, supplies, legal and court fees, marketing, and rent on a building.

Answer 1

Meera's law firm shows an accounting profit of $1,540,000 when considering only explicit costs. However, after factoring in implicit costs, including her forgone salary and investment returns, the economic profit is $1,310,800 for the first year.

Step-by-step explanation:

To ascertain whether Meera's decision to leave her job as a public defender to open her own law firm was financially sound, we must calculate both the explicit costs and implicit costs. The explicit costs consist of salaries, supplies, legal fees, marketing, rent, etc. On the other hand, the forgone salary and investment returns are considered implicit costs because these are opportunities Meera gave up to start her firm.

Meera’s firm generated revenue from billable hours, calculating as follows: 14,000 hours * $240/hour = $3,360,000. The cost associated with these hours is 14,000 hours * $130/hour = $1,820,000. Subtracting explicit costs from the revenue gives us an accounting profit of $1,540,000 for the first year. However, to calculate the economic profit, we must deduct the implicit costs: Meera's forgone salary of $204,000 plus the forgone interest on bonds, which is $504,000 * 5% = $25,200. Summing up these amounts gives us total implicit costs of $229,200. The economic profit, therefore, is $1,540,000 - $229,200 = $1,310,800.