Question

Entry, Exit, and Long Run Profitability — End of Chapter Problem A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year. a. What were your accounting profits of your firm over the past year? 170000 b. What were the economic profits of your firm over the past year? $ 506000 should not have c. Given this information, you launched your own business.

Answer 1

Answer:

$-36,000

Explanation:

Accounting profit = revenue - salary paid - equipment purchased

= 500,000 - (2 x 150,000) - 30,000

= 470,000 - 300,000

= 170,000

(a)

Computing for Economic profit = Accounting profit - Rent foregone - Salary given up

= 170,000 - 6,000 - 200,000

= - 36,000

(c) Since economic profit < 0, you should not have opened the business. You invited losses instead of gains, you should bit have started this at all