Question

Lynn is thinking about leaving her job as a CPA to open a clothing store. The estimated revenue for a year is $200,000. Her costs are $120,000 in rent, insurance, utilities, equipment, and inventory. She would also be forgoing her wages of $75,000 in order to run her business full time.

a. What is her accounting profit?

b. What is her opportunity costs?

c. What is her economic profit?

d. Should she leave her job and open this clothing store?

Answer 1

(A) ANSWER :: $80000

=> Accounting Profit = Total Revenue - Explicit Cost

= $200000 - $120000

= $80000

(B) Opportunity Cost :: $75000

It Is The Cost Which Is Associated With Loss Of Other Alternative When One Alternative Chosen It Is Know As Its Is A Cost Of Not Chosen Alternative

In Above example Opportunity Cost Is $75000 Because To Chose Open Clothing Store Lynn Quit Its Job That Pay Him $75000 So It Could Be Opportunity Cost For Him.

(C) ANSWER ::

=> Economic Profit :: Total Revenue - (Explicit Cost + Opportunity Cost )

= $200000 - ($120000 + $75000)

= $200000 - $195000

= $5000

(D)ANSWER ::

YES, Because The Accounting Profit Is $80000 And Its Wages On Job Is $75000 So We Clearly Shows That There Is A Profit For Lynn Of $5000 Which Is He Earn Extra Income By Clothing Store In Comparison To Job. If Lynn Wanted To Earn $5000 Extra Income He Have To Quit His Job And Run Its Business Full time.