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An individual leaves a college faculty, where she was earning $55,000 a year, to begin a new venture
An individual leaves a college faculty, where she was earning $55,000 a year, to begin a new venture. She invests her savings of $10,000, which were earn ng 10 percent annually. She then spends $22,000 renting office equipment, hires two students at $30,000 a year each, rents office space for $14,000 and has other variable expenses of $38,000. At the end of the year, her revenues are $220,000.
A. What are her accounting profits for the year? B What are her economic profits for the year? Be sure and show your work for both questions)
Expert Solution
a) Computation of Accounting Profits for the Year:
Accounting Profit = Total Revenue - Explicit Costs
= $220,000 - ($22,000+$30,000*2 + $14,000 + $38,000)
= $220,000- $134,000
Accounting Profit = $86,000
b) Computation of Economic Profits for the Year:
Economic Profit = Accounting Profit - Implicit Costs
= $86,000-($55,000+$10,000*0.10)
= $86,000-$56,000
Economic Profit = $30,000
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