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7 July, 17:12

An individual leaves a college faculty, where she was earning $60,000 a year, to begin a new venture. She invests her savings of $45,000 , which were earning 6 percent annually. She then spends $25,000 renting office equipment, hires two students at $22,000 a year each, rents office space for $12,000 , and has other variable expenses of $40,000. At the end of the year, her revenues are $200,000.

(a) What are her accounting profits for the year?

(b) What are her economic profits for the year?

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  1. 7 July, 17:33
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    (a) What are her accounting profits for the year?

    Accounting profits = 79000

    (b) What are her economic profits for the year?

    Economic profits=16300

    Explanation:

    Accounting profits = total revenues (200000) - total explicit costs of all inputs = 25000+40000 + (2x22000) + 12000)

    Accounting profits = 200000-121000

    Accounting profits = 79000

    Economic profits = total revenues-total opportunity cost of all inputs used - (explicit + implicit costs).

    $200000 - (121000+60000 + (45000*6%) =

    Economic profits=16300
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