Joe quits his computer programming job, where he was earning a salary of $50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the fol- lowing expenses: salary paid to himself, $40,000; rent, $0; other expenses, $25,000. Find the accounting cost and the economic cost associated with Joe’s computer software business.

Accounting costs represent all amount spent on transactions for the purchase of generate revenue. These are also known as explicit costs

Accounting cost for Joe =

40,000 + 25,000 = $65,000.

Economic costs on the other hand capture all accounting costs together with opportunity costs. Opportunity cost is the value of the next best alternative sacrificed in favor of a decision. Opportunity cost is also known as implicit cost

The opportunity cost for Joe includes

$10,000 reduction in salary he forfeited to start his business i.e ($50,000 - $40,000)

$24,000 rent he no longer receives .

Total opportunity cost = $10,000 +$24,000 = $34,000

Hence economic cost =

= $65,000 + $34,000

=$99,000