Answer to Question #155823 in Microeconomics for Una

Question

Upon graduating with an accounting degree, you open your own accounting firm of which you are the sole employee. To start the firm you passed on a job offer with a large accounting firm that offered you a salary of RM60,000 annually. Last year you earned a total revenue of RM100,000. Rent and supplies last year were RM50,000. 

Calculate:

a) annual economic cost,

b) annual economic profit,

c) annual accounting profit.

d) based on the above information, describe the condition of your firm

Answer 1

$\bold {Answers}$

a) Annual economic cost = RM110,000

b) Annual economic profit = -RM10,000

c) Annual accounting profit = RM50,000

d) The firm is incurring negative economic profits, but positive accounting profits. Compared to the job offer by an accounting firm, the firm is less profitable. Profits from the firm are lower than the salary offered by the accounting firm. Hence, investment in the firm is less attractive than the job.

$\bold {Solutions}$

a) Annual economic cost

Economic cost

= explicit cost + implicit cost

The only implicit cost is the opportunity cost in terms of RM60,000 foregone by not accepting the job offer by an accounting firm.

Explicit costs = RM50,000 rent and supplies.

Thus,

Economic cost = RM60,000 + RM50,000

= RM110,000

b) Annual economic profit

Economic profit

= Total revenue - Economic cost

= RM100,000 - RM110,000

= -RM10,000

c) Annual accounting profit

Accounting profit

= Total revenue - Explicit cost

= RM100,000 - RM50,000

= RM50,000

d) The firm is incurring negative economic profits, but positive accounting profits. Compared to the job offer by an accounting firm, the firm is less profitable. Profits from the firm are lower than the salary offered by the accounting firm. Hence, investment in the firm is less attractive than the job.