Question

4 6 7 8 10 11 Jen runs a martial arts club. She now has 60 trainees who pay monthly dues of $150. Every month she pays $2,000 in miscellaneous club-related expenditures including utilities, accounting services, etc. To run the club she quit her day job where she used to earn $5,000/month. She does not pay herself a salary for her time spent at the club. She runs the club from the first floor of her mother's house (a famous martial arts teacher herself). Her mother insisted that they make the arrangement official. As a result, Jen pays her mother $2,000/month for using the space. Using this information answer the following questions: Her monthly econ omic cost is $ Her monthly accounting cost is $ Her monthly economic profit is $ Her monthly accounting profit is $ Check Next page page 9234 31

Answer 1

The accounting profit is the difference between the total revenue generated and the total cost of producing it. The mathematical formula for accounting profit is Accounting profit = Total revenue - Total cost The economic profit is the difference between the total revenue generated and the cost of producing it plus the opportunity cost. The mathematical formula for economic profit is: Economic profit = Total revenue-Explicit cost-Implicit cost Total revenue = $150 x 60 = $9,000 Club related expenses + leasd amount from the space Economic Cost = + Wages from another job Economic Cost =$(2,000 + 2,000 + 5,000) = $9,000 Therefore, the economic cost I $9,000. Accounting cost = Club related expenses Accounting cost $2.000 Therefore, the accounting cost is $2,000 Economic Profit = Total Revenue - Economic cost Economic Profit = $(9,000 - 9,000) = 0 Therefore, the economic profit is equal to zero. Accounting Profit = Total Revenue - Accounting cost Accounting Profit =$(9,000 -2,000) = $7,000 Therefore, the accounting profit is $7,000