Question

Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.

Ellie's annual implicit costs will equal

a. $55,200.
b. $75,200.
c. $80,500.
d. $165,700.

Ellie's annual accounting costs will equal

a. $55,200.
b. $75,200.
c. $80,500.
d. $165,700.

Ellie's annual economic costs will equal

a. $55,200.
b. $75,200.
c. $80,500.
d. $135,700.

According to Ellie’s accountant, which of the following revenue totals will yield her business $50,000 in profits?

a. $55,200
b. $105,200
c. $132,500
d. $185,700

According to an economist, which of the following revenue totals will yield Ellie’s business $50,000 in economic profits?

a. $55,200
b. $100,200
c. $132,500
d. $185,700

Answer 1

Answer and Explanation:

The computations are shown below:

1. For annual implicit cost

= Earning annual salary + earned annual interest

= $80,000 + $500

= $80,500

2. For Annual accounting cost

= Explicit cost

= Direct expenses

= Office rent + rent of equipment + supplies + utilities + salary of a book keeper

= $15,000 + $3,000 + $1,000 + $1,200 + $35,000

= $55,200

3. For economic cost

= Accounting cost + implicit cost

= $55,200 + $80,500

= $135,700

4. For revenue

= Accounting profit + profit

= $55,200 + $50,000

= $105,200

5. For revenue

= Economic cost + profit

= $135,700 + $50,000

= $185,700