Question

Joey's Lawn Mowing Service rents office space from Joey's parents for $300 per month. A similar office space in the same building rents for $545 per month. Assuming Joey’s parents accounting cost associated with the building is zero, the monthly economic profit earned by Joey’s parents for renting space to Joey is:

Answer 1

Opportunity cost of $545 should be considered here. This is the benefit foregone since the room is not offered for rent outside. This is actually offered at lower.

Rent income of parents is $300, since this the only income by renting.

Since accounting cost is 0, accounting profit would be as below:

Accounting profit = Rent income – Accounting cost

                              = 300 – 0

                            = 300

Now economic profit would be as below:

Economic profit = Accounting profit – Opportunity cost

                           = 300 – 545

                           = - 245 (Answer)

Since economic profit is negative, it is actually a loss.