Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 6 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $5,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $6,000, pays $1,300 for fuel and maintenance, and hires one worker for $30,000. Sam's total revenue from pilot training classes this year equaled $90,400. Sam's accounting profit this year equals:

Question

Quizplus · Accepted Answer

Sam's total costs:
- Opportunity cost of his salary as a pilot: $40,000
- Withdrawal from savings: $10,000 x 0.06 = $600
- Rent forgone from owning building as a hanger: $5,000
- Rent for computer: $1,200
- Office supplies: $500
- Rent for airplane: $6,000
- Fuel and maintenance for airplane: $1,300
- Worker salary: $30,000

Total costs: $84,600

Sam's accounting profit:
Revenue - Total costs = $90,400 - $84,600 = $5,800

However, Sam's economic profit would be lower once the opportunity cost of his time and the cost of capital (the money withdrawn from savings) are considered.

Sam Quits His Job as an Airline Pilot and Opens