An individual leaves a college faculty, where she was earning $60,000 a year, to begin a new venture. She invests her savings of $45,000 , which were earning 6 percent annually. She then spends $25,000 renting office equipment, hires two students at $22,000 a year each, rents office space for $12,000 , and has other variable expenses of $40,000. At the end of the year, her revenues are $200,000.

(a) What are her accounting profits for the year?

(b) What are her economic profits for the year?

Question

Business

Livia Hensley

20 June, 02:57

An individual leaves a college faculty, where she was earning $60,000 a year, to begin a new venture. She invests her savings of $45,000 , which were earning 6 percent annually. She then spends $25,000 renting office equipment, hires two students at $22,000 a year each, rents office space for $12,000 , and has other variable expenses of $40,000. At the end of the year, her revenues are $200,000.

(a) What are her accounting profits for the year?

(b) What are her economic profits for the year?

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Answers (1)

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Jessica Goodwin · Answer 1

(a) What are her accounting profits for the year?

Accounting profits = 79000

(b) What are her economic profits for the year?

Economic profits=16300

Explanation:

Accounting profits = total revenues (200000) - total explicit costs of all inputs = 25000+40000 + (2x22000) + 12000)

Accounting profits = 200000-121000

Accounting profits = 79000

Economic profits = total revenues-total opportunity cost of all inputs used - (explicit + implicit costs).

$200000 - (121000+60000 + (45000*6%) =

Economic profits=16300