Question

Marcie quit her job as a gardener, which paid an annual salary of $63,000, and became a baker. She used $15000 out of her savings account that paid a 10% annual interest rate to buy an oven and other start-up capital. In her first year of operations, she spent $2,000 on supplies and $250 a month on rent. She earned revenue of $80,000. What are Marcie’s accounting and economic profits over the course of the year?

$________ in accounting profits and $ _______ in economic profits

Answer 1

Difference between accounting and economic profit is that, while accounting profit only considers the explicit costs, the economic profit considers the opportunity cost in addition to explicit cost. Opportunity cost is the cost of giving up other alternatives in favor of the selected option.

Explicit Cost	Amount
Initial Investment ($)	15,000
Cost of Supplies ($)	2,000
Rent for a Year ($)	$250 × 12 = 3,000
Total Explicit Cost ($) (Accounting Cost)	20,000
Opportunity Cost
Annual Salary Foregone ($)	63,000
Annual Interest Foregone ($) at 10% per annum	1,500
Total Opportunity Cost ($)	64,500
Total Economic Cost ($) (Accounting Cost + Opportunity Cost)	84,500

Total Revenue = $80,000

Accounting Profit = Total Revenue – Accounting Cost

Accounting Profit = $80,000 – $20,000

Accounting Profit = $60,000

Economic Profit = Total Revenue – Economic Cost

Economic Profit = $80,000 – $84,500

Economic Profit = – ($4,500)