Economan has been infected by the free enterprise bug. He sets up a firm on extr

Question

Economan has been infected by the free enterprise bug. He sets up a firm on extraterrestrial affairs. The rent of the building is $4,000, the cost of the two secretaries is $40,000, and the cost of electricity and gas comes to $5,000. There's a great demand for his information, and his total revenue amounts to $100,000. By working in the firm, though, Economan forfeits the $50,000 he could earn by working for the Friendly Space Agency and the $4,000 he could have earned as interest had he saved his funds instead of putting them in his business.

a) What is the profit o loss by an accountant's definitions?

b) What is profit or loss by an economist's definitions?

Explanation / Answer

First we must know the difference of accounting profit and economic profit. Keep in mind, accountants do not add implicit costs when calculating. revenue for both is 100,000 Accounting costs=rent of building(4000)+two secrataries(2*40,000)+Gas/electirc(5000)=89,000 Economic cost=accounting cost(89,000)+opportunity cost of Economan(50,000+4000)= 143,000 The difference here is accountants say the firm has a profit of 100,000-89,000=11,000 while economist know the real profit is 100,000-143,000=-43,000 Therefore your answer is A. 11,000 B. -43,000

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