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Costs and Profit Maximization Under Competition End of Chapter Problem 21
Costs and Profit Maximization Under Competition End of Chapter Problem
21. Sandy owns a firm with annual revenues of $1,000,000. Wages, rent, and other costs are $900,000.
a. Sandy's accounting profit is $
b. Suppose that instead of being an entrepreneur, Sandy could get a job with one of the following annual salaries (i) $50,000; (ii) $100,000; or (iii) $250,000. Assume that a job would be as satisfying to Sandy as being an entrepreneur.
Sandy's economic profit under scenario (i) is $
.
Sandy's economic profit under scenario (ii) is $
.
Sandy's economic profit under scenario (iii) is $
Expert Solution
a. Computation of Accounting Profit:
Accounting Profit = Total Revenue - Explicit Cost
= $1,000,000 - $900,000
Accounting Profit = $100,000
b. Computation of Economic Profit:
Economic Profit = Accounting Profit - Implicit Cost
Sandy's economic profit under scenario (i):
Economic Profit = $100,000 - $50,000 = $50,000
Sandy's economic profit under scenario (ii):
Economic Profit = $100,000 - $100,000 = $0
Sandy's economic profit under scenario (iii):
Economic Profit = $100,000 - $250,000 = -$150,000
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