Question

You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual costs of $160,000 for labor, $50,000 for rent, and $30,000 for equipment. There is a one-half probability that revenues will be $210,000 and a one-half probability that revenues will be $400,000.

c. Suppose the government imposes a 25 percent tax on accounting profits. This tax is only levied if a firm is earning positive accounting profits. What will your after-tax accounting profit be in the low-revenue case?

In the high-revenue case?

What will your average after-tax accounting profit be?

What about your average after-tax economic profit?

Will you now want to quit your job and try your hand at being an entrepreneur?

   (Click to select)  No  Yes

d. Other things equal, does the imposition of the 25 percent profit tax increase or decrease the supply of entrepreneurship in the economy?

Answer 1

Answer)

1. Accounting profit=Revenue-Costs,in case of low revenue this will be $210,000-$160,000-$50,000-$30,000=-$30,000,since accounting profit is negative no tax will be levied and accounting profit post tax will be -$30,000;in case of high revenue total profit will be $400,000-$240,000=$160,000,25% tax on this gives us post tax accounting profit of $120,000.
2. For average accounting profit since we have 50% probability of each case so average accounting profit becomes (-$30,000+$120,000)/2 which gives us $90,000/2=$45,000
3. For economic profit we have to subtract opportunity cost which is $60,000 which gives us average economic profit of $45,000-$60,000=-$15,000
4. Our average accounting profit is $45,000,which is less than our current job salary,so we will not go for entrepreneurship
5. 25% tax definitely decreases supply of entrepreneurship as it decreases the profit substantially and decreases the spirit of entrepreneurship.

Answer is complete.Thank you!