Question

Peggy-Sue’s cookies are the best in the world, or so I hear. She has been offered a job by Cookie Monster, Inc., to come to work at $125,000 per year. Currently, she is producing her own cookies, and she has revenues of $260,000 per year. Her costs are $40,000 for labor, $10,000 for rent, $35,000 for ingredients, and $5,000 for utilities. She has $100,000 of her own money invested in the operation, which, if she leaves, can be sold for $400,000 that she can invest at 1 percent per year.

a. Calculate her accounting and economic profits.
b. Advise her as to what she should do.

Answer 1

accounting profit 170,000

economic profit 41,000

I would advise her to continue with their venture as it yields a better gain rather than beingan employee and invest their money elsewhere.

Step-by-step explanation:

accounting profit:

revenues 260,000

cost 40,000

rent 10,000

ingredients 35,000

utilities 5,000

Total explicit cost (90,000)

Accounting profit 170,000

The economic profit will take into consideraring their opportunity cost of the factors

wages opportunity cost: (125,000)

capital opportunity cost: 400,000 x 1% = (4,000)

Net economic gain 41,000

Answer 2

a.Accounting Profits: amount of money you actually make

Accounting Profits from taking Job: 125,000+(1+.1)*40,000=169,000

Accounting Profits from owning Business: 260,000-40,000-10,000-35,000-5,000=170,000

Economic Profits: amount of money you make over the best secondary option

Economic Profits from taking Job: -1,000

Economic Profits from owning Business: +1,000

b.Advise her to continue to own Job