Question

Mike used to work as a commercial painter for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3% interest, and borrowed $30,000 from his uncle whom he pays 3% interest per year. Last year Mike paid $25,000 for supplies and had a revenue of $60,000. How would and accountant and an economist calculate Mike's costs?

Answer 1

Answer:

Accountant   34,100 gain

Economist      (6,500) loss

Explanation:

Accountant:

revenue               60,000

operating cost    25,000

Interest expense     900   ( 30,000 x 3%)

net income          34,100

Economist:

revenue     60,000

explicit cost 25,900

implicit cost (opportunity cost):

savings yield:

20,000 x 3% = 600

painter job   40,000

economic loss (6,500)