Question

Assume your friend has a bakery that sells cakes. Their fixed accounting costs are $2000 per month and their accounting average variable cost is $2. They produce and sell 1000 cakes per month at $10 per cake. Assume that your friend could earn $60,000 per year as an accountant.

Is your friend earning an accounting profit or loss?

Is your friend earning an economic profit, loss, or normal returns?

Should your friend continue with the bakery or consider accounting, other things constant? Why might they pick one career over the other?

Answer 1

Ans: Yes ,  your friend is earning an accounting profit.

Explanation:

Total fixed cost = $2000

Average variable cost = $2

So total variable cost to produce 1000 units of cakes = 1000 *$2 = $2000

Total revenue = Price * total quantity sold

=$10 *1000 = $10000

Accounting Profit = Total Revenue - Total cost ( explicit cost )

= $10000 - ($2000 + $2000)

= $10000 - $4000

=$6000

Ans: Yes , your friend is earning an economic loss.

Explanation:

Economic profit / loss  = Total revenue - total explicit cost - total implicit cost

= $10000 - $4000 - $60000

= - $54000

Ans: Your friend should  consider accounting.

Explanation:

By considering accounting job your friend can earn more as compared to bakery business.

Ans: They might pick one career over the other due to opportunity cost.