Question

Jolene is opening a doggy daycare named "Little Barks." She is leaving her current job where she makes $75,000 per year in order to start her own business. The building that Little Barks will be located in is already owned by Jolene, as she was leasing this location out to a tenant for $5,000 per month. Additionally, Jolene will have to pay $10,000 for business permits and insurance in case one of the dogs bites another dog or a person. Jolene will need to buy dog food, toys, beds, and other miscellaneous equipment that will cost an estimated $20,000. She expects revenue to be $125,000 a year. Calculate Jolene’s accounting and economic profit. Address whether Jolene should open Little Barks, or stay at her current job. Fully explain how you came to your answers.

Answer 1

Answer:

Accounting profit is the difference between total revenue and accounting cost in which the accounting cost is containing only the explicit cost incurred. Economic profit is the difference between total revenue and total opportunity cost, the latter containing both the explicit cost and the implicit cost incurred.

Accounting profit = revenue - explicit cost

Accounting profit = 125,000 - (10000 + 20000)

Accounting profit = 95,000

Economic profit = accounting profit - implicit cost

Economic profit = 95,000 - (75000 + 5000)

Economic profit = 15,000

This implies that while accounting profit does not undertake implicit cost of economic activity (cost for which no explicit payment is made separately), economic profit does deduct them. Now economic profit is positive, Jolene should open Little Barks.