Question

C) Richard owns and operates an Electronics and Computer shop in Los Angeles. While Richard has a Mechanical Engineering degree and could work for CISCO Systems Corp. earning $76,000 a year, his true passion is managing his own shop. Below is a list of Richard's expenses for 2016. Use the following information to answer the questions: (show your work) Revenue in 2016 $105,000 Rent $20,000 Equipment Cost $5,200 Supplies $2,750 Depreciation of Assets $1,050 What is Richard's Accounting Profit? What is Richard's Economic Profit? Given Richard's economic profit why does he still decide to manage his own shop instead of working for CISCO?

Answer 1

C)

Accounting profit = total revenue - explicit costs

= 105000-(20000+5200+2750+1050)

= 76000

Economic profit = accounting profit - implicit costs

= 76000-76000 = 0

He would decide to manage his own shop as he is able to recover all of his costs and so in future, he might be able to earn a positive economic profit.