Question

Suppose steve has been offered two jobs- an industry job and a teaching job. He's considering taking the industry

job. The teaching job has a salary of $80,000. In addition to the salary, Steve values the flexibility of a teaching job at $15,000 a year. The industry job requires buying more fancy clothes and those will cost $600. The industry job pays $100,000. In addition to the industry jobs salary, Steve values that they dont have to work on the weekend at the industry job at $10,000.

i. What is the explicit cost for the year of the industry job?

ii. What is the implicit cost for the year of the industry job?

iii. What is the accounting profit for the industry job (hint: You might want to think about this as "accounting benefit minus explict cost")

Iv. what is the economic profiy for the industry job (hint: economic benefit minus economic cost)

V. what salary for the industry job is needed for Steve to recieve a normal profit (hint: this is where economic benefit equals economic cost)

Answer 1

I. Explicit cost involves actual outflow of cash for the business bwhich in this case would only be cost of clothes i.e $600

ii Implicit cost would be the opportunity cost which involves the earnings with teaching job along with additional job cash benefit=$80000+$15000=$95000

iii accounting profit= accounting benefits-explicit cost , accounting benefit= salary from industry job =$100000 and explicit cost=$600 hence , accounting profit=100000-600=$99,400

iv) economic profit=economic benefits- explicit cist- implicit cost

Economic benefits=accounting benefit +implicit benefits=$100000+ benefit of not working on weekends=100000+10000=110000

Economic profit=110000-95000-600=$14400

v) normal profit will happen when economic cost=economic benefit this gives Salary+10000=95000+600 this gives Salary=$85,600