The data in the table represents annual costs and revenue for Ted\'s Vintage Thr

Question

The data in the table represents annual costs and revenue for Ted's Vintage Threads, a used clothing store in Key West, Florida. Ted works 72 hours a week at the store. He also owns the building that houses his business, and if he closed the store, he could rent out the building for $30,000 per year and go to work for his cross-town rival, Cassie's Classic Couture, and earn a salary of $30,000 per year Wages Paid Interest Paid on Loans Other Expenditures for Factors of Production Total Revenue $25,000 10,000 30,000 120,000 The economic cost for Ted's Vintage Threads is sEnter your response as a whole number) The economic proft for Ted's Vintage Threads is s Enter your response as a whole number and indlude a negative sign if necessary) Are these figures the same as the accounting cost and accounting proft? Explain ? A. No, the accounting profit would be lower since the accounting revenue is lower O B. No, the accounting proft could be lower or higher, since the opportunity cost is not included in the accounting profit O C. No, the accounting profit would be high?r since the opportunity cost is not included in the accounting profit. O D. No, the accounting profit would be lower since the opportunity cost is not included in the accounting profit.

Explanation / Answer

Economic Cost = Implicit cost + explicit cost

Implicit cost is the opportunity cost that the producers sacrifice in order to continue the production.

Here the implicit cost is the salary and the rent of the builiding that Ted foregone in order to continue his production. As if he does not use this buliding for production he could get the rent of $30,000 per year also he could do a job and get a salary of $30,000 if he does not used his labour in the store.

So the total Implicit cost is $30,000 + $30,000 = $60,000.

Explicit cost is the cost in which there is a cash outflow.

Here in this case explicit cost is wages paid + interest paid on loans + other expenditures on factor of production.

So the total Explicit cost is $25,000 + $10,000 + $30,000 = $65,000

- The economic cost for Ted's Vintage Threads is $60,000 + $65,000 = $125,000

Economic profit = Total Revenue - Economic cost

- The economic profit for Ted's Vintage Threads is $120,000 - $125,000 = - $5,000.

Correct option is C.The accounting profit would be higher since the opportunity cost is not included in the accounting profit.

It is correct because Accounting profit = Total revenue - explicit cost

so , accounting profit will be $120,000 - $65,000 = $55,000 which is greater than economic profit it is so because in accounting profit we do not consider the implicit cost or the opportunity cost.

other options are incorrect as-

option A) is incorrect because the accounting profit is $55,000 which is greater than the economic profit.

option B) is incorrect because accounting profit is always higher or equal to economic profit, it will never be lower.

option D) is incorrect because accounting profit is higher not lower than economic profit.

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