Question

Suppose Lando Calrissian owns a smuggling business whose total revenue is $30,000 per month. The accompanying table shows Lando’s monthly expenses. If Lando weren't a smuggler, he would earn $6,000 per month working for the Rebel Alliance. Apart from pay, Lando is indifferent between working as a smuggler and working for the Rebel Alliance.

Fuel	$4,000
Maintenance	$12,000
Weapons	$6,000
Bribes	$3,000

What is Lando’s accounting profit each month ?

A)1000 B)5000 C)-1000 D)-5000

Answer 1

The correct answer is (B) $5000

Accounting Profit = Total Revenue - Explicit Cost

Total Revenue of Lando = $30000

Explicit cost is the cost a producer incurred on factor of production. According to information given in the above table, Explicit Cost =Cost of Fuel + Maintenance cost + Cost of weapons + Bribe = 4000 + 12000 + 6000 + 3000 = $25000.

Hence, Explicit cost = 25000

=> Accounting profit = total revenue - explicit cost = 30000 - 25000

= $5000

Hence, the correct answer is (B) $5000

Note:

Accounting profit does not takes into consideration Implicit Cost. Implicit cost is the income Lando could earn If he does not starts his business and work for a Rebel Alliance.