Harvey develops gaming apps from home instead of working as an engineer and earning $50,000 a year.He has invested $20,000 to upgrade to the hardware that he needs and estimates his expenses at $17,000 a year.If downloads generate $45,000 in revenue during the first year,then his business _____
A)has an accounting profit but an economic loss.
B)has an accounting loss and an economic profit.
C)has both accounting and economic profits.
D)has both an accounting and an economic loss.
E)has a normal profit.

Question

Quizplus · Accepted Answer

Accounting profit is calculated as total revenue minus explicit costs. Here, Harvey's revenue is $45,000, and his explicit costs (expenses) are $17,000, not including the $20,000 hardware upgrade as it is a one-time investment. So, his accounting profit is $45,000 - $17,000 = $28,000. Economic profit takes into account both explicit and implicit costs. The implicit cost here includes the forgone salary of $50,000. Adding the explicit costs of $17,000 to the implicit cost gives total costs of $67,000. Since his revenue is $45,000, he has an economic loss because he is not covering the opportunity cost of not working as an engineer plus his expenses.

Harvey Develops Gaming Apps from Home Instead of Working as an Engineer