Question

Assume you own and operate an auto repair shop in which you work and employ Harriet, a mechanic whose skills are very similar to yours, at $45,000 per year. Also assume that you do not pay yourself but rather hope for a profit at the end of the year.

A. would the cost of your labor be an accounting cost? explain?

B. would the cost of your labor be an implicit cost? Explain?

C. Would the caculated profit at the end of t he year reflect an economic profit? Explain?

D would $45,000 per year be a reasonable estimate of the opportunity cost of your labor? Why or why not

E. Assume accounting profits at the end of they year are $55,000. What is the economic profit?

Answer 1

A. Would the cost of your labor be an accounting cost? explain?

No.

Accounting cost involves the direct costs involved in running business. Since nothing is paid to owner for his services, it is not accounted.

B. Would the cost of your labor be an implicit cost? Explain?

Yes.

It is an opportunity cost. Owner might have got this amount if he had worked somewhere else with same skill set.

C. Would the calculated profit at the end of t he year reflect an economic profit? Explain?

No.

Calculated profit is accounting profit. It does not take implicit costs into consideration, while economic profit takes implicit costs in to consideration. So, it is not an economic profit.

D would $45,000 per year be a reasonable estimate of the opportunity cost of your labor? Why or why not

Yes,

Since skill set of worker is similar to that of owner, it is a reasonable estimate of opportunity cost of owner's labor.

E. Assume accounting profits at the end of they year are $55,000. What is the economic profit?

In absence any other implicit cost,

Economic profit=Accounting profit-Implicit Cost=55000-45000=$10000