Question

Jodi is a successful lawyer. She earns $50,000 per year from her law job plus $5,000 per year in rental income from a building she owns that is rented to a clothing store. Jodi also has $10,000 in a savings account that earns 10% interest, or $1,000 per year.

One day, Jodi decides to leave her profession and open a bookstore in the building she owns. She withdraws the money from her savings account and uses it to purchase special computer software for the bookstore. At the end of the year, her accountant sends her the following statement:

Total sales: $200,000

Total expenses:

Cashiers’ wages: $50,000

Books purchased: $75,000

Advertising: $5,000

Insurance: $5,000

Taxes: $10,000

Accountant fees: $5,000

Total: $150,000

What are Jodi’s Economic and Accounting Costs and Profits?

Accounting Costs:

Accounting Profits:

Economic Costs:

Economic Profits:

Should Jodi have gone into the book-selling business?

Answer 1

Answer:

Accounting costs= Explicit costs =$(50,000+75,000+5,000+5,000+10,000+5,000) +$10,000

=$160,000

Accounting profit= Total Revenue - Accounting Cost

=$(200,000-160,000) =$40,000

Economic Cost= Accounting cost + Opportunity cost

= $150,000 + $(50,000+5,000+1,000)

=$206,000

Economic profit = Total Revenue - Economic cost

= $(200,000 - 206,000)

= -$6,000

Since the economic profit is negative, it is clear that Jodi should not have gone for the book selling job.