Question

Suppose you purchased 11 discounted tickets for an upcoming pop music concert. The tickets cost you $1,848.00 total. To purchase the tickets, you used money from your savings account. Currently, the bank does not pay any interest on money in savings accounts.

Your hope is to resell the tickets the day of the concert. If you sell the tickets outside the concert, you can sell them for $210.00 per ticket.

A ticket scalper wants to corner the market, but to do that he needs your tickets. The scalper has offered to pay you $2,772.00 total for your tickets.

Suppose you decide to sell the tickets to the scalper. Your accounting profit from this transaction would be $ _______?

Your economic profit would be $ ________?

Answer 1

Accounting profit is the profit earned after considering the actual inflows and outflows. It ignores the opportunity cost of choosing your alternative over the other. It is the profit recorded in the books of accounts.

Economic Profit includes accounting profit and the opportunity cost of choosing your alternative. It includes both implicit and explicit costs. It is useful to make the actual business decisions.

A) Calculation of accounting profit on the transaction:

i) Cost:

Cost of 11 tickets:$1,848

ii) Revenue:

On selling the tickets to the scalper- $2,772

iii) Accounting profit=Revenue-Cost

=$2,772-$1,848

Accounting Profit=$924

B) Calculation of economic profit"

i) Cost:

-Cost of 11 tickets:$1,848

-Opportunity cost of losing the interest income on savings account: NIL, since the interest rate is 0.

-Opportunity cost of not selling the tickets outside the concert:$210 per ticket* 11 tickets= $2,310

Total cost=$1,848+$0+$2,310

=$4,158

ii) Revenue

On selling the tickets to the scalper- $2,772

iii) Accounting profit=Revenue-Cost

=$2,772-$4,158

Accounting Profit/(Loss)= -$1,386

Hence, it can be seen that even though I have earned an accounting profit of $924, I have incurred an economic loss of $1,386. I should have chosen the decision of selling the tickets outside.