ECONOMICS Ellie has been working for an engineering firm and earning an annual s
ID: 1104904 • Letter: E
Question
ECONOMICS
Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.
a) What is Ellie's annual accounting cost?
b) What is Ellie's annual economic cost?
c) What is Ellie's annual accounting profit?
d) What is Ellie's annual economic profit?
Explanation / Answer
Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.
a) What is Ellie's annual accounting cost?
This would be the cost for which explicit payment is made. This includes $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper
Annual cost = 15000 + 3000 + 1000 + 1200 + 35000 = $55,200
b) What is Ellie's annual economic cost?
This includes both accounting explicit cost and opportunity cost of lost money = 55200 + 500 + 80000 = $135,700
c) What is Ellie's annual accounting profit?
There is no information of revenue so accounting profit will be R - 55200
d) What is Ellie's annual economic profit?
There is no information of revenue so economic profit will be R - 135700
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