Question

Jaynet spends $30,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm – one offer was for $95,000 per year, and the other was for $100,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 25 paintings per year at a price of $8,000 each:

a. What are her accounting profits?

$  

b. What are her economic profits?

$  

Answer 1

An implicit cost can be defined as the opportunity cost equal to what a firm give up for using the factor of production which it already owns and thus does not pay rent for it.

Opportunity cost is the next best alternative.

Implicit cost=$100,000 per year

An explicit cost is defined as the direct payment made to others for using the resources and running a business. For instance, wage, rent and materials.

Explicit cost=$30,000 per year

Total revenue=P*Q

=8,000*25

=$200,000

a.

Accounting profit= Total revenue - total explicit cost

=200,000-30,000

=$170,000

b.

Economic profit= total revenue- ( explicit cost + implicit costs)

=200,000 - (30,000+100,000)

=200,000-130,000

=$70,000