Class Work Opportunity Costs Tom borrows $40,000 from doughnut shop. The interes
ID: 1115514 • Letter: C
Question
Class Work Opportunity Costs Tom borrows $40,000 from doughnut shop. The interest on this loan is 5% a year. He spends $25,000 on supplies (year) and pays $10,000 /year in rent. He quits his $25,000/ year job to work in his shop. 1. a bank to buy the equipment necessary to open a Total Revenue 40,000 Calculate a. Accounting profit b. Economic Profit c. Does he earn enough accounting profit to cover his opportunity costs? Charles uses $40,000 from his savings to buy the equipment necessary to open a doughnut shop. The interest on his savings was 5% a year. He spends $25,000 on supplies (year) and pays $10,000 /year in rent. He quits his $25,000/ year job to work in his shop. Total Revenue -40,000 2. Calculate: a. Accounting profit b. Economic ProfitExplanation / Answer
1. Accounting profit = TR - TC
Accounting profit = 40,000 -(25000 + 10000 + 5% of 40000)
Accounting profit = 40,000 - 37,000
Accounting profit = $3,000
2. Economic profit = Accounting profit - Implicit cost
Economic profit = 3,000 - 25,000
Economic profit = -22,000
3. No
His accounting profit is way less than his opportunity cost.