Question

Jaynet spends $35,000 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 $105,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 20 paintings per year at a price of $8,000 each:

a. What are her accounting profits?

b. What are her economic profits?

Answer 1

1) Accounting profit = Total revenue - Total costs

Total cost = 35000

Total revenue = 8000*20 = 160000

Accounting profit = (8000*20)-35000

Accounting profit = 125000$

2) Economic profit = Accounting profit - implicit costs

Implicit costs are forgone costs

For forgoing 95000$ per year job

Economic profit = 125000-95000 = 30000$

For forgoing a 105000$ job per year

Economic profit = 125000-105000 = 20000$

For forgoing both the jobs

Economic profit = 125000-(105000+95000)

Economic profit = -75000