Question

You are an entrepreneur and currently doing a job at retail store as an area manager with salary of $60,000 and considering giving up the job to become full time entrepreneur by setting up a fitness center in your neighborhood. Luckily, you inherited the building from your dad which you will use for your fitness center. A comparable size of building in the neighborhood is rending for $24000/ a year including utilities and property taxes. You expect to earn a revenue of $100,000 annually and you will have $20,000 of gym equipment lease cost annually.
Q1. Calculate your accounting profit and economic profit as an employer. State any assumptions you are making carefully. (show your calculations).

Q2. What is the difference between accounting profit and economic profit? Which profit is generally greater? Why?

Answer 1

1.Ans: Accounting profit = $80,000 and economic profit = -$4000

Explanation:

Accounting profit = Total revenue - Total Explicit Cost

=  $100,000 - $20,000 = $80,000

Economic profit = Accounting profit - Total Implicit Cost

= $80,000 - ( $60,000 +$ 24000)

= $80,000 - $84,000

= -$4000

2.Ans: The basic difference between accounting profit and economic profit is that accounting profit considers only explicit costs whereas economic profit considers both explicit and implicit costs.

Generally accounting profit is greater than the economic profit.