Question

Raheem is currently working as a financial analyst earning $75,000 a year and is considering quitting his current job to start an art gallery. The estimated annual revenue from the art gallery is $175,000. The annual cost of labor, advertising, and acquiring the art inventory is $125,000. What are raheem’s accounting and economic profits if he opens the art gallery?.

Answer 1

Raheem's accounting profit is $50,000 and his economic profit is $-25,000.

What is the accounting and economic profit?

Accounting profit is the difference between the revenue earned from a business and the explicit cost incurred in running the business. Explicit cost includes the amount expended in running the business.

Accounting profit= total revenue - explicit cost

Accounting profit = $175,000 - $125,000 = $50,000

Economic profit is the difference between accounting profit and implicit cost. Implicit cost is the cost of the next best option forgone when one alternative is chosen over other alternatives.

Economic profit = accounting profit - implicit cost

Economic profit = $50,000 - $75,000

Economic profit = -$25,000

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