Question

Jayne spents $30,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm-one- offer was for $95,000 per year, and the others was for$100,000. However,she turned both job down to continue a painting career. If jaynet sells 25 painting per year at year at a price of $8000 each: what are her accounting profits? What are her economic profits?

Answer 1

Accounting profit and Economic profit both are different. The formula for calculating both is as :

ACCOUNTING PROFIT :

Accounting profit = total revenue - explicit cost

ECONOMIC PROFIT :

Economic profit = total revenue -(implicit cost + explicit cost)

Now here we need to know three things that :

Total revenue = total income

Implicit cost= It is the opportunity cost that we gave to do something else.

Explicit cost=It is the cost of all physical payments

Now we'll calculate accounting profit and economic profit

Accounting profit = total revenue - explicit cost

=(Total revenue = price × quantity ) - explicit cost

=($ 8000 × 25 ) - $ 30000

= $ 200000 - $ 30000

= $ 1,70,000

Before calculating economic profit we need to know that there are two implicit cost $ 100000 and $ 95000 respectively.

Economic profit where the implicit cost which is also called as opportunity cost is $ 95,000

Economic profit = Total revenue - (implicit cost+ explicit cost)

Total revenue = $ 2,00,000

Implicit cost = $ 95,000

Explicit cost = $ 30,000

Economic profit = $ 200000 - ( $ 95000+ $ 30000)

$ 200000- $ 1,25,000

Then economic profit here is = $ 75,000

Where implicit cost / opportunity cost is $ 1,00,000

Total revenue = $ 2,00,000

Implicit cost = $ 1,00,000

Explicit cost = $ 30,000

Economic profit = Total revenue - (Implicit cost+Explicit cost)

$ 2,00,000 - ($ 1,00,000+$ 30,000)

$ 2,00,000 - $ 1,30,000

Here the economic profit here is $ 70,000.