April quit her job as an accountant at Ernst and Young, where she was paid $45,000 per year. She started her own landscaping business. She rents machines and tools for $50,000 and pays $10,000 as wages to her help. These are her only costs. April earned total revenue of $100,000. Which of the following statements is true?

Question

Quizplus · Accepted Answer

April's explicit costs are the tangible, out-of-pocket expenses, which are $60,000 ($50,000 for machines and tools + $10,000 in wages). Her accountant would calculate her accounting profit by subtracting these explicit costs from her total revenue, which is $100,000 - $60,000 = $40,000. However, she also has an implicit cost, which is the forgone salary of $45,000 from her previous job. Her economic profit considers both explicit and implicit costs, which would be $100,000 - $60,000 (explicit) - $45,000 (implicit) = -$5,000, indicating an economic loss. Therefore, both statements A and B are correct.

April Quit Her Job as an Accountant at Ernst and Young