Question

A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year.

Required:
a. What were your accounting profits of your firm over the past year?
b. What were the economic profits of your firm over the past?

Answer 1

170,000

$-36,000

Step-by-step explanation:

Accounting profit= total revenue - explicit cost

Total revenue =price x quantity sold

Explicit cost includes the amount expended in running the business. They include rent , salary and cost of raw materials

Economic profit = accounting profit - implicit cost

Implicit cost is the cost of the next best option forgone when one alternative is chosen over other alternatives

Accounting profit = $500,000 - [( $150,000 x 2) + $30,000] = $170,000

Economic profit = $170,000 - ($200,000 + $6000) = -36,000