Question

A year ago, Akashdeep left his job at the Best Bicycle Repair Shop, and opened his own business: the “Even Better Bicycle Repair Shop”. He had been earning $40,000 per year at Best Bicycle. His total revenue at “Even Better” was $95,000. To open his shop, Akashdeep cashed in a $10,000 savings certificate which was earning 2% interest per year. His costs for the year were $25,000 to rent his uncle’s garage, and $5,000 for supplies. [8]

a) What were Akashdeep’s total explicit costs for the year?

b) What were Akashdeep’s total implicit costs for the year?

c) What was Akashdeep’s accounting profit for the year?

d) What was Akashdeep’s economic profit for the year?

Answer 1

Explicit cost is the cost of hired factors of production and implicit cost is the cost of self owned factors of production. Here explicit cost for the year were $25,000 to rent his uncle’s garage, and $5,000 for supplies. Implicit cost is the 2% interest per year on the savings certificate of $10000 and earnings $40,000 per year at Best Bicycle. Accounting profit considers only explicit cost and economic profit condider both explicit and implicit costs.

a)Akashdeep’s total explicit costs for the year = 25000+5000 = $30000

b) Akashdeep’s total implicit costs for the year = 40000+(0.02*10000) = $40,200

c) Akashdeep’s accounting profit for the year = 95000-30000 =$65000.

d)Akashdeep’s economic profit for the year = 95000-(40200+30000) = $24800