Question

Ms. Ramirez runs a small consulting firm. She rents a building for $4,000, the cost of two secretaries is $40,000 and the annual cost of electricity and gas is $6,000. There is great demand for her work and her total revenue is $150,000. She was offered a job with another firm for $75,000 salary, but she refused the offer. The money (all of which is her own) invested in her company could have been put in a bank and could earn her $4,000 per year in interest. Calculate the accounting and economic profits for Ms. Ramirez’s consulting firm.

Answer 1

Answer : Here

Explicit cost = 4,000 + 40,000 + 6,000 = $50,000

Accounting profit = Total revenue - Explicit cost

=> Accounting profit = 150,000 - 50,000 = $100,000

Therefore, the accounting profit of Ms. Ramirez's firm is $100,000.

Here, implicit cost = 75,000 + 4,000 = $79,000

Economic profit = Total revenue - (Explicit cost + Implicit cost)

=> Economic profit = 150,000 - (50,000 + 79,000)

=> Economic profit = $21,000

Therefore, the economic profit of Ms. Ramirez's firm is $21,000.