Question

Joe is the owner-operator of Joe’s Haircuts Unlimited. Last year he earned $200,000 in total revenues and paid $125,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $50,000 per year.

1.) What are Joe’s explicit costs?

2.) What are Joe’s implicit costs?

3.) What are Joe’s accounting profits?

4.) What are Joe’s economic profits?

Answer 1

1. $125,000

2. $50,000

3. $75,000

4. $25,000

Step-by-step explanation:

Explicit cost is actual cost incurred. It is the total cost incurred by running the business. Explicit cost is $125,000

Implicit cost is also known as opportunity cost. Opportunity cost is the cost of the next best option forgone when one alternative is chosen over other alternatives. Implicit cost is $50,000.

Accounting profit is total revenue less total explicit cost.

Accounting profit = Revenue - Explicit Cost

$200,000 - $125,000 = $75,000

Economic profit is accounting profit less implicit cost or opportunity cost.

Economic profit = Accounting profit - implicit cost

$75,000 - $50,000 = $25,000

I hope my answer helps you

Answer 2

1. $125000

2. $50000

3. $75000

4. $25000

Step-by-step explanation:

1. Implicit cost is the cost Joe must give up in order to run his business.

Thus,

Implicit cost = $50,000

$50,000 is the highest offer for employment he received.

2. Explicit cost refers to the total amount used in starting up the business, in this case, refers to the amount used in paying salaries and suppliers.

Thus

Explicit cost = $125,000

3. Accounting profits

= Revenue - explicit cost

= 200000 - 125000

= $75000

4. Economic profits

= Revenue - (explicit + implicit)

= 200000 - 125000 + 50000

= 200000 - 175000

= $25000