Question

​Felicia, a certified public accountant​ (CPA), runs her own consulting firm. Last​ year, she spent​ $24,510 on student​ employees, plus had another​ $81,000 in administrative expenses​ (e.g. utilities,​ insurance, rent). She pays herself a salary of​ $50,000. Because she is a​ CPA, Felicia could be employed alternatively as a​mid-level manager in a large accounting​ firm, making a salary of​ $96,780 a year.  

Last​ year, Felicia’s accounting costs were

​(Enter

your response as an

integer.​)

Last​ year, Felicia's economic costs were

​$nothing.

​(Enter

your response as an

integer.​

Answer 1

Accounting costs include explicit costs. Explicit costs refers to the cash expenditure incurred by the firm to hire or purchase factors of production.

Calculate Felicia's accounting cost -

Accounting cost = Spending on student employees + Administrative expenses + Salary paid to herself

Accounting cost = $24510 + $81000 + $50000 = $155,510

Thus,

Last​ year, Felicia’s accounting costs were $155,510.

Economic cost includes the explicit and implicit costs.

Explicit costs = Spending on student employees + Administrative expenses + Salary paid to herself

Explicit cost = $24510 + $81000 + $50000 = $155,510

Felicia could have earned $96,780 as salary by working somewhere else. However, by working on her own she is getting a salary of $50,000. Thus, by working on her own she is forgoing a salary of ($96,780 - $50,000) $46,780.

Implicit cost = Salary foregone = $46,780

Calculate the Felicia's economic cost -

Economic cost = Explicit cost + Implicit cost = $155,510 + $46,780 = $202,290

Thus,

Last​ year, Felicia's economic costs were $202,290.