3. Accounting versus economic profits. (10 points) Christine owns an architecture firm. Last year,...

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3. Accounting versus economic profits. (10 points) Christine owns an architecture firm. Last year, her business had the following statement of revenues and costs. (Anything that is not listed as revenue falls under costs.) As the sole owner of the business, Christine receives all its profit and does not formally pay herself a salary. She owns the building where her firm is located and can always close the firm 1 Revenues 360,000 Supplies 200,000 Utilities 10,000 Wages of employees 85,000 and rent the building to someone else for $10,000 per year. She has a job offer from the city to design their new city hall, and they are offering her a salary of $X per year. Assume that Christine can only choose one option (to run her business or work for the city). (a) (3 points) What is the accounting cost for Christine’s firm? What is the accounting profit? (b) (3 points) What is the economic cost for Christine’s firm? What is the economic profit? (c) (4 points) At the current offer of $X per year, Christine decides to take the city’s job offer. What can we say about the city’s offered salary if Christine is choosing optimally?

Robert · Accepted Answer

a) Accounting cost for firm = 200000 (Supplies) + 85000 (Wages of employees) + 10000 
(Utilities) = $ 295,000
Accounting profit = Revenues – Accounting cost = 360000 – 295000 = $ 65,000
b) Economic costs would also include the implicit costs i.e.

3. Accounting versus economic profits. (10 points) Christine owns an architecture firm. Last year, her business had the following statement of revenues and costs. (Anything that is not listed as...

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