2. Lucy quits a $50,000 job to open her waffle business. She makes $225,000 in revenue from her first year of waffle sales. She pulls $50,000 out of an account that returns 3% interest per year and invests the entire amount in her business. She also borrows $50,000 at 10% interest rate to invest in her business. After these initial investments, she also spends $10,000 on inputs and $50,000 on worker salaries.
Find total revenue, accounting cost, economic cost, implicit cost, explicit cost, economic profit, accounting profit.
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To find the total revenue, accounting cost, economic cost, implicit cost, explicit cost, economic profit, and accounting profit, we will break down the given information and calculate each component.
1. Total Revenue:
Total revenue is the sum of all the revenue generated by Lucy's waffle business. According to the information given, Lucy makes $225,000 in revenue from her first year of waffle sales.
Total Revenue = $225,000
2. Accounting Cost:
Accounting cost refers to the explicit costs incurred in running a business. These costs include expenses such as inputs, worker salaries, and other explicitly paid expenses. From the information provided, Lucy spends $10,000 on inputs and $50,000 on worker salaries.
Accounting Cost = Inputs + Worker Salaries
= $10,000 + $50,000
= $60,000
3. Economic Cost:
Economic cost includes both explicit costs (accounting cost) and implicit costs. Implicit costs refer to the opportunity cost of using the resources for a particular business instead of the next best alternative. In this case, Lucy's explicit cost is $60,000. However, she also quit her $50,000 job to start her waffle business, and this foregone salary is an implicit cost.
Economic Cost = Accounting Cost + Implicit Cost
= $60,000 + $50,000
= $110,000
4. Implicit Cost:
As mentioned earlier, Lucy's implicit cost is the foregone salary from her previous job, which amounts to $50,000.
Implicit Cost = $50,000
5. Explicit Cost:
Explicit costs are the out-of-pocket expenses incurred in running a business. In this case, Lucy's explicit costs include the $10,000 spent on inputs and $50,000 spent on worker salaries.
Explicit Cost = Inputs + Worker Salaries
= $10,000 + $50,000
= $60,000
6. Economic Profit:
Economic profit is the total revenue minus the economic cost.
Economic Profit = Total Revenue - Economic Cost
= $225,000 - $110,000
= $115,000
7. Accounting Profit:
Accounting profit is the total revenue minus the accounting cost.
Accounting Profit = Total Revenue - Accounting Cost
= $225,000 - $60,000
= $165,000
To summarize:
Total Revenue = $225,000
Accounting Cost = $60,000
Economic Cost = $110,000
Implicit Cost = $50,000
Explicit Cost = $60,000
Economic Profit = $115,000
Accounting Profit = $165,000