Question

  Jaynet spends $30,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm – one offer was for $110,000 per year. However, she turned the offer down to continue a painting career. If Jaynet sells 25 paintings per year at a price of $8,000 each.

a)       Calculate accounting and economic profits
b)      Distinguish between accounting versus economic profits.

Answer 1

a) Total revenue = $8,000 * 25 = $200,000

Explicit cost = 30,000

Implicit cost = 110,000

Accounting profit = Total revenue - Explicit cost = 200,000 - 30,000 = $170,000

Economic profit = Total revenue - Explicit cost - Implicit Cost = 200,000 - 30,000 - 110,000 = $60,000

b) Accounting profit includes explicit costs,i.e., the expenditures made to outsiders for hiring their services like wages and purchase of raw materials. On the other hand, economic profit includes explicit as well as implicit costs, which are implied or imputed costs. These are the costs of owner's own factors of production, like owner's own building used in business, owners own money invested in business and the owner who works for his/her own business, etc, used in production.