How do I solve the accounting and economic profit for the following:
Suppose Kristen owns and operates a piano store. On average her total revenur i $200k and her total costs are $150k yearly. The market clearing price for renting her facilities are $10k, and she knows for certain that she could earn a salary of $45k a year working as an assistant manger at another company
Accounting costs only take into account explicit costs, i.e her total cost.
Economic costs take into account both explicit cost and implicit costs. In this case, the implicit cost are the foregone rent Kristen (my girlfriend) could be earning by renting out her facility and the foregone wages she could be earning at another company.
Thus,
Accounting Profits = $200,000 – $150,000 = $50,000.
Economic Profits = $200,000 – $150,000 – $10,000 – $45,000 = -$5,000
Here, Kristen’s accountant will report that she’s making $50,000 per year. Her boyfriend the economist will inform her that her choice to run her own business is costing her $5,000 per year.
If you’re having trouble, don’t be afraid to email me.