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22 December, 11:36

Last year, Jarod left a job that pays $60,000 to run his own bike-repair shop. Jarod's shop charges $65 for a repair, and last year the shop performed 3,000 repairs. Jarod's production costs for the year included rent, wages, and equipment. Jarod spent $50,000 on rent and $100,000 on wages for his employees. Jarod keeps whatever profit the shop earns but does not pay himself an official wage. Jarod used $20,000 of his savings to buy a machine for the business. His savings were earning an annual interest rate of 5 percent. Instructions: Round your answers to the nearest dollar and include a negative sign if appropriate. a. What is Jarod's annual accounting profit? b. What is Jarod's annual economic profit?

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  1. 22 December, 11:46
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    (a) $45,000

    (b) - $16,000

    Explanation:

    Accounting profits = Total revenue - Total costs

    = ($65 * 3,000) - (100,000 + 50,000)

    = $195,000 - $150,000

    = $45,000

    Economic profits = Accounting profits - Opportunity cost

    = $45,000 - [$60,000 + (5% * $20,000) ]

    = $45,000 - [$60,000 + $1,000]

    = $45,000 - $61,000

    = - $16,000
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