Question

Robin is a young hairstylist who decided to open her own beauty salon. She withdrew $30,000 out of her personal savings account and used it to start her new salon. The savings account pays 8 percent interest per year. She also had to quit her job as a hairstylist’s assistant that paid $40,000 a year. Furthermore, Robin had to take over an office space that she owns and rents to someone else for $20,000 a year. Finally, she spent $15,000 for materials, $5,000 for utilities, and $45,000 for an assistant, but during the first year of her beauty salon, Robin earned a total revenue of $250,000.

a.[2 points] Find Robin’s accounting profit. b.[3 points] Find Robin’s economic profit.

Answer 1

A. Accounting Profit

Accounting Profit= Revenue - Explicit Cost

Explicit cost is payments made to outsiders for the production of a commodity.

Example: wages paid to labor, Utilty cost, payment of raw material, rent of building

Given data in question

Revenue- $250000

Rent- $20000

Raw material-$15000

Utilities- $5000

Assistany salary-$45000

Explicit cost= 20000+15000+5000+45000 =$85000

Accounting profit= Revenue - Explicit Cost

=$250000-$85000

=$165000

B. Economic Profit

Economic Profit= Accounting Profit - Implicit Cost

Economic Profit= Revenue - Explicit cost - Implicit Cost

Implicit Cost is the estimated cost of self owned resources.

Example: Rent of own building, Interest of own capital, Wages of enterpreneur.

Implict cost in the question is

Wages of enterpreneur= $40000

Interest of own capital= $30000*8%= $2400

Implicit cost= $40000+@2400= $42400

Economic Profit= Accounting Profit - Implicit Cost

=$165000-$42400

=$122600