Question

Alvin is considering opening a ski shop in Colorado. Assume Alvin will incur the following costs: building rent = $100,000/year, inventory = $250,000/year, energy = $50,000/year, and labor (one clerk) = $10,000/year. In addition, Alvin's current income as a computer programmer is $40,000 per year. Assuming that Alvin would earn $460,000 in revenues in his first year:

a. What would Alvin's Accounting Profit for the first year be?

b. What would Alvin's Economic Profit for the first year be?

Answer 1

a. Accounting profit = Total revenue - total explicit costs

Accounting profit = Total revenue - building rent -inventory -energy cost -labor cost

Accounting profit = 460000 -100000 -250000 -50000 -10000 = $50000

b. Accounting profit = Total revenue - total explicit costs -implicit cost

Accounting profit = Total revenue - building rent -inventory -energy cost -labor cost -opportunity cost of Alvin

Accounting profit = 460000 -100000 -250000 -50000 -10000 -40000 = $10000