Question

Liam runs his own business selling refrigerators. He receives $7,000/week from sales, with business related expenses being $6,200/week. Liam previously worked as a carpenter before selling refrigerators, with take home pay of $800/week. Which of the following statements are true: Liam is earning a normal profit from choosing to sell refrigerators. Liam's accounting profit from selling refrigerators is $800/week. There is an incentive for Liam to leave the market for refrigerators and return to being a carpenter. Liam's economic profit in this situation is equal to $0/week.

Answer 1

1. Accounting profit involves total revenue minus the total explicit costs.
2. Economic profits also include implicit costs (opportunity cost).

Liam Accounting profit by selling refrigerator = Total Revenue - Total explicit costs

= $7000 - $6200

= $800/week

Liam economic profit by selling refrigerator   = Total Revenue - Total explicit costs - Total opportunity cost

  = $7000 - $6200 - $800

= $0/week

The accounting profit for Lian is same for both in selling refrigerator and in carpenting. Lian is earning zero economic profits in selling refrigerators which is also known as normal profits in economics.