Hillary starts her own business. She quits her $50,000 a year job, rents an office for $15,000 a year, pays wages and salaries of $50,000 a year, utilities of $4,000 a year, and materials of $20,000. She uses her own car for sales work rather than leasing an equivalent car for $6000 a year. If revenues are $140,000, her accounting profit and economic profit are respectively

Question

Quizplus · Accepted Answer

Hillary's accounting profit is calculated by subtracting her total expenses from her revenues:
Revenue - Expenses 
$140,000 - ($15,000 + $50,000 + $4,000 + $20,000 + $6,000*) = $45,000
*Since Hillary uses her own car rather than leasing one, we do not include the opportunity cost of leasing a car in her expenses.

Her economic profit is calculated by subtracting both her explicit and implicit costs from her revenues:
Revenue - Explicit Costs - Implicit Costs 
$140,000 - ($15,000 + $50,000 + $4,000 + $20,000 + $6,000) - Opportunity cost of her time and labor = $-5,000
Even though Hillary has a positive accounting profit, her economic profit is negative because she is not earning enough to compensate for the opportunity cost of her time and labor. Therefore, the best choice is C.

Hillary Starts Her Own Business