Question

Raheem is currently working as a financial analyst earning 75,000
a year and is considering quitting his current job to start an art gallery. The estimated annual revenue from the art gallery is 175,000
. The annual cost of labor, advertising, and acquiring the art inventory is 125,000
. What are Raheem’s accounting and economic profits if he opens the art gallery?


Accounting profit is
, and economic profit is
.


a

Accounting profit is
, and economic profit is
.


b

Accounting profit is
, and economic profit is
.


c

Accounting profit is
, and economic profit is
.


d

Accounting profit is
, and economic profit is
.

Answer 1

Accounting profit = Revenue − explicit costs = 175,000 − 125,000 = 50,000.

Economic profit = Revenue − explicit costs − implicit (opportunity) costs = 175,000 − 125,000 − 75,000 = −25,000.

So accounting profit is $50,000 and economic profit is −$25,000 (an economic loss).