Question

Dale quit his $60,000 teaching job at the Wonderful College and started his own consulting firm last year. He figured that since he doesn’t have to pay himself a salary and since he could use an office with a market rental value of $6,000 in a building which he owns, he could save a lot of money and have a profitable business. His last year’s revenues & expenses are listed below: a. Calculate Dale’s accounting profit. (4pts) b. Is Dale an Accountant or an economist? Why? Prove your answer numerically & provide complete explanation & interpretation. What would be your advice to him?

Total consulting revenues: $70,000 Advertising: $3,000 Insurance: $2,000 Secretary’s salary: $12,000 Miscellaneous expenses: $3,000 All other expenses: $4,000

Answer 1

(a)

Accounting profit ($) = Revenue - Explicit costs =

Revenue - Advertising - Insurance - Secretary salary - Miscellaneous expense - Other expenses

= 70,000 - 3,000 - 2,000 - 12,000 - 3,000 - 4,000

= 46,000

(b)

Economic profit ($) = Accounting profit - Implicit cost

= Accounting profit - Own salary given up - Rental income given up

= 46,000 - 60,000 - 6,000

= - 20,000

Since Dale is incurring economic loss, but instead of quitting, wants to continue the businss only because accounting profit is positive, he is thinking like and accountant but not an economist.