Question

Although Goldman Sachs paid Heather $90,000.00 per year, she was not satisfied with her job. She had loved going white-water rafting and skiing with her family in Utah since she was a little girl. So last year, she decided to open her own business: Family Adventures. During the summer, she takes families on different white-water trips, and in the winter, she leads clients on skiing trips. To start her business, Heather borrowed $100,000 from a bank and used $70,000.00 of her savings. Her savings earned 10% interest. At the end of the year, she wanted to know whether her new business venture was worthwhile. The table below lists her total revenue and itemized costs for Family Adventures.

Item	Annual Dollar Value
Total revenue	$280,000.00
Employee wages	$120,000.00
Rent on her business office	$25,000.00
Payments on bank loan	$10,000.00
Utility and gas expenses	$5,000.00

1st attempt

Part 1   (0.5 point)

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Family Adventures' accounting profit was $   .

Part 2   (0.5 point)

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Family Adventures' economic profit was $   . (If the economic profit is less than zero, be sure to include the - sign.)

Answer 1

Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs; accounting profit consists of revenue minus explicit costs.

• Explicit costs are monetary costs a firm has. Implicit costs are the opportunity costs of a firm’s resources.
• Accounting profit is the monetary costs a firm pays out and the revenue a firm receives. It is the bookkeeping profit, and it is higher than economic profit. Accounting profit = total monetary revenue- total costs.
• Economic profit is the monetary costs and opportunity costs a firm pays and the revenue a firm receives. Economic profit = total revenue – (explicit costs + implicit costs).

Calculation of Accounting Profit
Item	Amount
Revenue	280,000.00
Employee Wages	(120,000.00)
Rent on Business Office	(25,000.00)
Payment on Bank Loan	(10,000.00)
Utility and gas expense	(5,000.00)
	120,000.00

Calculation of Economic Profit
Item	Amount
Revenue	280,000.00
Employee Wages	(120,000.00)
Rent on Business Office	(25,000.00)
Payment on Bank Loan	(10,000.00)
Utility and gas expense	(5,000.00)
Opportunity costs:-
Loss of Salary from Goldmann Sachs	(90,000.00)
Loss of Interest Savings	(7,000.00)
Economic Profit	23,000.00