You work in a large Fortune 500 company as a marketing manag

You work in a large Fortune 500 company as a marketing manager. You currently earn $115,000 per year. You are considering leaving to start your own advertising firm.

If you start your own firm, you estimate the firm will earn about $275,000 in revenue per year. You estimate that rent for your office will be $45,000 per year, secretarial and IT support will cost $45,000 per year, and that taxes will cost your firm about $100,000.

Calculate your accounting profits.

Calculate your ECONOMIC profits.

Solution

Answer

Accounting profit=total revenue-accounting cost or explicit costs
=275000-45000-45000-100000
=85000
Accounting profit is $85000
Economic profit=accounting profit-opportunity cost
=85000-115000
=-30000
Economic loss is $30000 or profit is -$30000