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An individual leaves a college​ faculty, where she was earning ​$70,000 a​ year, to begin a new venture. She invests her savings of ​$42,000​, which were earning 7 percent annually. She then spends ​$25,000 renting office​ equipment, hires two students at ​$18,000 a year​ each, rents office space for ​$9,000​, and has other variable expenses of ​$40,000. At the end of the​ year, her revenues are ​$200,000. Her accounting profit is ______.
Her economic profit is ​_______.

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Answer 1

Accounting profit will be $90,000.

Explanation

All of her costs will be added together which will give a profit amount.

First of all,

$25,000 of office renting equipment

Then $18,000 each on hiring students

This makes $36,000.

In addition, she rents office space for $9000 and other variable costs are of $40,000.

These costs accumulated makes $110,000.

These costs of $110,000 will be deducted from her Revenue of $200,000

Thereby, her business is left with $90,000 accounting profit.

Answer 2

Economic profit is $87,060.

Explanation

By adding all the cost of her business which includes office rent equipment, employing students, office rental space for working, and the variable cost of the office while it is in use of the works. After deducting the revenue from the total cost

Her economic profit will be $90,000

($42,000 x 7%) which is $87,060.

Hence, her economic profit is $87,060.

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