Question

Question

Suppose Professor Donald spends $5,000 per year on tax supplies and Cube Smart storage space. He recently received two job offers from a XYZ marketing firm- one offer were for $ 60,000 per year, and the other was for $50,000. However, she turned both jobs down to continue her tax preparation business and storage firm. If Donald sells 10 paintings per year at a price of $9,000 each:

What is her total revenue? Explain

What are her accounting profits?

What are her economic profits?

Which type of profit ( accounting or economic profit) reflects the best use of her time? Explain

Answer 1

1) Revenue is the total money she receives from selling her painting.

Her total revenue equals $90,000

2) Accounting profit is total revenue minus expenditures

Her accounting profit is $85,000

3) Economic profit includes opportunity (implicit) cost also. In this case, she has to say no to a job giving her $60,000 an year. Hence that 60,000 is her opportunity cost. We subtract only the salary best alternative use for her time.

Her economic profit by selling paintings is $25,000

4) Economic profit reflects the best use of her time.There could be many avenues where she earns a positive accounting profit. This doesnt reflect the opportunity cost she is incurring while forgoing other opportunities. Whereas, the economic profit takes care of the other best alternative opportunity also. Hence economic profit reflects the best use of her time.