Larry left a job as an accountant making $40,000 a year to open his own business. Larry now owns his own automotive repair shop and employs three mechanics. His total parts and sales volume this year was $322,400. Because he is well known for his repair expertise, he is also paid $5,200 per year by a local radio station to answer automotive repair questions on Ask the Mechanic segment. His explicit costs for payroll, parts and taxes, mortgage, and utilities are $290,160. Larry's economic profit is:

Question

Yosef Rowland

Business

28 January, 16:35

Larry left a job as an accountant making $40,000 a year to open his own business. Larry now owns his own automotive repair shop and employs three mechanics. His total parts and sales volume this year was $322,400. Because he is well known for his repair expertise, he is also paid $5,200 per year by a local radio station to answer automotive repair questions on Ask the Mechanic segment. His explicit costs for payroll, parts and taxes, mortgage, and utilities are $290,160. Larry's economic profit is:

+2

Answers (1)

Know the Answer?

Lisa · Answer 1

Larry's economic loss = $2,560

Explanation:

Economic profit = accounting profit - opportunity costs

Accounting profit = ($322,400 + $5,200) - $290,160 = $37,440 Opportunity costs = $40,000 that Larry used to make as an accountant

Economic profit/loss = $37,400 - $40,000 = - $2,560

Opportunity costs are defined as the extra costs (or lost benefits) resulting from choosing one activity (or investment) over another alternative.