Question

Larry left a job as an accountant making $40,000 a year to open his own business. Larry now owns his own automotive repair shop and employs three mechanics. His total parts and sales volume this year was $322,400. Because he is well known for his repair expertise, he is also paid $5,200 per year by a local radio station to answer automotive repair questions on Ask the Mechanic segment. His explicit costs for payroll, parts and taxes, mortgage, and utilities are $290,160. Larry's economic profit is:

Answer 1

Larry's economic loss = $2,560

Step-by-step explanation:

Economic profit = accounting profit - opportunity costs

• Accounting profit = ($322,400 + $5,200) - $290,160 = $37,440
• Opportunity costs = $40,000 that Larry used to make as an accountant

Economic profit/loss = $37,400 - $40,000 = -$2,560

Opportunity costs are defined as the extra costs (or lost benefits) resulting from choosing one activity (or investment) over another alternative.