Question

Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.

(Show your steps!)

1. What are Ellie's annual implicit costs?
2. What are Ellie's annual accounting costs?
3. According to an economist, which of the following revenue totals will yield Ellie’s business $50,000 in economic profits?

Answer 1

a) Implict cost = Annual salary she could earn in the engineering firm + Interest she was earning on Certificat eof deposit

= 80,000 + 500

= $80500

b) Accounting cost = office rent + equipment rental + supplies + utilities + salary of a secretary/bookkeeper.

= 15000 + 3000 + 1000 + 1200 + 35000

= $55200

c) revenue totals will yield Ellie’s business $50,000 in economic profits

Economic profit = Revenue - total cost ( implicit + accounting)

50,000 = Revenue - ( 80500 + 55200)

Revenue = 50,000 + 135700

= 185700

So, $185700 revenue totals will yield Ellie’s business $50,000 in economic profits.