Peggy-Sue’s cookies are the best in the world, or so I hear. She has been offere

Question

Peggy-Sue’s cookies are the best in the world, or so I hear. She has been offered a job by Cookie Monster, Inc., to come to work for them at $125,000 per year. Currently, she is producing her own cookies, and she has revenues of $260,000 per year. Her costs are $40,000 for labor, 1$10,000 for rent, $35,000 for ingredients, and $5,000 for utilities. She has $100,000 of her own money invested in the operation, which if she leaves can be sold for $40,000 that she can invest at 10 percent per year.
a. Calculate her accounting and economic profits.
b. Advise her as to what she should do.

Explanation / Answer

Accounting Profits: amount of money you actually make Accounting Profits from taking Job: 125,000+(1+.1)*40,000=169,000 Accounting Profits from owning Business: 260,000-40,000-10,000-35,000-5,000=170,000 Economic Profits: amount of money you make over the best secondary option Economic Profits from taking Job: -1,000 Economic Profits from owning Business: +1,000 Advise her to continue to own Job

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