Usnavi runs a bodega in Washington Heights making $40,000 per year. He is consid

Question

Usnavi runs a bodega in Washington Heights making $40,000 per year. He is considering leaving his job open a bar in on the beach. He estimates that he will need to spend $80,000 per year on space and supplies and $120,000 per year on staff. The restaurant will earn $300,000 per year in revenue.

A) Assuming his estimates are accurate, what will Usnavi’s accounting profit be each year?

B) Assuming his estimates are accurate, what will Usnavi’s economic profit be each year?

C) In your own words, explain why economists are more concerned with economic profit when the rest of the world typically thinks of accounting profit?

Explanation / Answer

Usnavi's opportunity cost (implicit cost) will be = $40,000

Explicit cost = $(80000+ 120,000) = $200,000

And, Total revenue = $300,000

A) Accounting profit = Total revenue - Explicit cost = $ (300,000 - 200,000) = $ 100,000

B) Economic profit = Total revenue - (explicit cost + Implicit cost) = Accounting profit - Implicit cost = $(100,000 - 40,000) = $60,000.

C) Economists are more concerned with economic profit because it considers opportunity cost of starting a business. And, economic profit is useful to decide whether a business is worth it from more than the financial standpoint. Accounting profit is necessary to determine income tax and financial performance. But, economists give more preference to economic profit to determine market entry, stay or exit etc.

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