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2 November, 06:06

Economan has been infected by the free enterprise bug. He invests in some equipment to do research and publish results. He sets up and runs a firm that studies extraterrestrial genetic studies. For a one-year period the rent of the building is $20,000, the cost of two secretaries is $120,000 total, and the cost of utilities comes to $40,000. There is demand for the services and the revenues total $250,000 for the year. By working in the firm, though, Economan forfeits the $50,000 he could earn by working for the Friendly Space Agency and the $4,000 he could have earned as interest had he saved his funds instead of putting them in his business. a) What is the profit o loss by an accountant's definitions? b) What is profit or loss by an economist's definitions?

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  1. 2 November, 09:30
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    Accountant's profit = $70,000

    Economist's profit = $16,000

    Explanation:

    Economic profit is the difference between the sales revenue and the total of implicit cost and explicit cost

    Implicit cost are opportunity costs The value of the sacrifice forgone in favour of a decision.

    For example, in this question, salary of $50,000 and the interest of $4000 forgone.

    Accountant definition

    sales revenue less all costs with exclusion opportunity cost

    Profit = 250,000 - (20,000 + 120,000 + 40,000)

    =$70,000

    Profit from the economist definition

    Interest on capital forfeited and salaries forfeited

    = 250,000 - (20,000 + 120,000 + 40,000) - (50,000 + 4000)

    = 260,000 - 180000 - 54,000

    =$16,000
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