Question

20. Bruce Chang owns his own bookkeeping firm, and runs it out of the basement in his home. 2. Bruce claims that his firm is low cost because he doesn't have to pay any rent for an office. Is this true? Briefly explain. b. Bruce has recently turned down an offer to be a postal worker for $55,000 per year. His income from bookkeeping is $48,000 per year. Is his bookkeeping business profitable? c. Bruce loves to be his own boss, and this is worth $10,000 per year to him. Does this change your answer to (b)? How so?

Answer 1

a) This is not true. Although Bruce is not required to pay any rent for office because he is running his office through the basement of the home but he could have rented that somebody else and could have earned income.
So this lost income is actually the opportunity cost of using the basement.
Opportunity cost is the benefits forfeited of choosing the next best option.

b) The business could be profitable or not because accounting profit could be calculated by subtracting the cost and other expenses which are given in the information. However, his company is making an economic loss. If he would have chosen to be a postal worker then his income would have been $55000 per year and now he is making $48000 per year from his business.
This means he has forgone the income of $7000 which is an economic loss.

c) Everybody likes to be his own boss and so does Bruce and he is valuing that at $10000. Again, we can not comment on accounting profit but now he is in the economic profit. He is earning benefits worth $58000 which $3000 more than the opting of working as a postal worker. He is in the economic profit now.