Accounting Versus Economic Profit
(Explicit and Implicit Costs)
Table represents the annual income statement of Joe’s Clothing Store. Joe worked full time in the store and invested $30,000 to buy the store and stock it with merchandise. He recently turned down an offer of a salaried position paying $10,000 per year to manage another store. He didn’t pay himself a salary during the year.
|
REVENUES
|
COSTS
|
|
Sales
|
$57,000
|
Wholesale clothing
|
$30,000
|
|
|
|
Equipment
|
$2,000
|
|
|
|
Labor
|
$15,000
|
|
|
|
Utilities
|
$1,000
|
|
Total Revenue
|
$ 57,000
|
Total Cost
|
$48,000
|
Q1. According to table, what is Joe’s explicit cost? Accounting profit?
Q2. What major items did he exclude from his costs from an economic standpoint?
Hint: opportunity cost
Q3. Suppose Joe could have earned 10% interest if he, instead of buying the store and merchandise, invested the $30,000 in the bank. How much interest is he losing per year by keeping the money invested in the store?
Q4. In light of your answers to b. and c., calculate Joe’s implicit cost, opportunity cost and economic profit or loss.