Accounting Profit and Economic Profit
1. Suppose Charlie Brown opens a lemonade stand. He hires Linus and Lucy for $12 a week ($6 each). He "rents" pitchers and spoons from his mother for $5 a week and spends $20 a week on paper cups, lemons, sugar and other materials. Before he opened the stand, he was earning $15 a week selling newspapers. He grosses $72 in revenues a week from lemonade sales. Calculate accounting costs, economic costs, accounting profit, and economic profit.
Accounting costs _______________________
Economic costs ________________________
Accounting profit _______________________
Economic profit ________________________
2. Famer McDonald gives banjo lessons for $20 an hour. One day, instead of giving banjo lessons, he spends 10 hours planting $100 worth of seeds on his farm. The seeds yield crops that he can sell for $200. What are the accounting costs, economic costs, accounting profit and economic profit associated with growing crops?
Accounting costs _______________________
Economic costs ________________________
Accounting profit _______________________
Economic profit ________________________
3. Suppose your aunt has just closed her books from her first year in the retail cookie business and is ecstatic with the profit her accountant says she has earned. Her business earned $115,000 in sales revenue over the year, and its costs for raw materials, rent, electricity, and the like were $80,000. Your uncle is not as elated, but cannot figure out exactly why. In discussing the situation with you (the family economist), he offers the following information. Your aunt gave up her job, which was paying $22,000 a year. Your uncle worked in the cookie store every evening and most weekends - giving up the opportunity to take on additional clients or to work overtime. In addition to being tired, he estimates that he lost $15,000 in additional income. Determine the accounting profit, economic profit and economic costs of the cookie business. Would you recommend that they keep the cookie business running next year?
Accounting profit ________________________
Economic costs_________________________
Economic profit_________________________
Recommendation________________________
4. After working as a head chef for years, Jared gave up his $60,000 salary to open his own restaurant last year. He withdrew $50,000 of his own savings that had been earning 4% interest and borrowed another $100,000 from the bank at a rate of 5%. As the restaurant space that Jared was leasing had no separate office, he converted his basement apartment into office space. He had previously rented the apartment to a student for $300 a month. The restaurant has total revenues of $590,000 last year. Employee wages were $120,000; materials were $350,000; utilities were $10,000; rent was $25,000 and interest on the bank loan was $5,000.
What is Jared's accounting profit, economic profit?
Accounting profit __________________________________
Economic costs ______________________________________
Economic profit ______________________________________
5. Hiro owns and operates a small business that provides economic consulting services. During the year he spends $55,000 on travel to clients and other expenses, and the computer that he owns depreciates by $2,000. If he did not use the computer, he could sell it and earn yearly interest of $100 on the money created through the sale. Hiro's total revenue for the year is $100,000. Instead of working as a consultant for the year, he could teach economics and make a salary of $50,000. Calculate economic and accounting profit and determine if Hiro should continue as a consultant or should he teach.
Accounting costs _______________________________
Accounting profit _______________________________
Economic costs _________________________________
Economic profit ________________________________
Consult or teach __________________________________