Julia prepares tax returns and does bookkeeping. Last year her revenues from the tax and bookkeeping business were $150,000, and her expenses for the business were $15,000. When she started her tax and bookkeeping business, Julia gave up her supplemental job doing in-home pet sitting. She used to earn $10,000 per year from pet sitting. Assume that she incurred no costs for her pet sitting business. How much Julia's economic profit and explicit cost?

Economic Profit = $125,000

Explicit Cost = $15,000

Explanation:

Total revenue from the tax and book keeping business = $150,000

Total expenses for business = $15,000

Supplemental job given up = $10,000

Explicit cost is defined as the actual payment which is made to a third person, in order to the current business.

Here explicit cost is NIL

Opportunity cost is the next best earnings foregone, in order to get the current earnings.

Here opportunity cost = $10,000

Economic profit = Revenue - Cost - Explicit cost - Opportunity cost = $150,000 - $15,000 - $10,000 = $125,000

Final Answer

Economic Profit = $125,000

Explicit Cost = $0

Economic Profit is $125000 while the explicit cost is $15000.

Explanation:

Explicit costs are the costs that are directly related to the business and requires an actual payment or an outflow of cash/resources from the business.

Implicit costs, on the other hand, are the opportunity cost of doing the business and includes the benefits foregone. These costs do not involve any cash or resource outflow from the business.

The economic profit is calculated by deducting the total explicit cost and the total implicit costs from the revenue.

The explicit costs here are the business expenses of $15000 while the implicit cost is the revenue foregone from in-home pet sitting of $10000.

Economic profit = 150000 - (15000 + 10000) = $125000