Question

1. Accounting versus economic profit In a given year, a marketing firm has the following costs: $560,000 in wages and salaries paid to employees; $74,000 in rental payments for office space; and $170,000 for office supplies, advertising, and utilities. In addition, Janet, the owner of the firm, works for the firm full time (and is not paid a salary, since she receives the firm's profits). If she did not work for the marketing firm, Janet could earn $120,000 per year working as a marketing manager for another firm. For each possible amount of total revenue, fill in the accounting profit and economic profit of the marketing firm. Total Revenue Accounting Profit Economic Profit (Dollars) (Dollars) (Dollars) 700,000 750,000 800,000 850,000

Answer 1

Solution:

Total Revenue   Accounting Profit   Economic Profit     
700,000   -104,000   -224,000     
750,000   -54,000   -174,000     
800,000   -4,000   -124,000     
850,000   46,000   -74,000     

Working:
Total Explicit Costs = Wages and Salaries + Rental Payments + Payments for Office Supplies = 560,000 + 74,000 + 170,000 = 804,000 per year
Total Implict Costs = 120,000

Total Revenue   Accounting Profit   Economic Profit     
   Total Revenue - Explicit cost   Total Revenue - Explicit cost - Impicit Cost     
700,000   700,000 - 804000 = -104,000   700,000 - 804000 - 120,000 = -224,000     
750,000   750,000 - 804000 = -54,000   750,000 - 804000 - 120,000 = -174,000     
800,000   800,000 - 804000 = -4,000   800,000 - 804000 - 120,000 = -124,000     
850,000   850,000 - 804000 = 46,000   850,000 - 804000 - 120,000 = -74,000