A person starts her own business. She quits her $40,000 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

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Accounting profit is calculated as total revenue minus explicit costs, which is $140,000 - ($15,000 + $50,000 + $4,000 + $20,000) = $51,000. Economic profit also considers implicit costs, such as the forgone salary of $40,000 and the car lease of $6,000, so it is $140,000 - ($15,000 + $50,000 + $4,000 + $20,000 + $40,000 + $6,000) = $5,000.

A Person Starts Her Own Business