A and B are painters and have the exact same cost structures except that A paint

Question

A and B are painters and have the exact same cost structures except that A paints in a house he owns but that he could rent out for $4,000/year, while B paints in a house that he rents from Ithaca Realty for $4,000/year. Both A and B would become photographers and earn salaries of $50,000/year if they quit painting for themselves. Assume that the painting business is a perfectly competitive industry. Which one of the following is true?

A. A earns more accounting profit and more economic profit than B does.

B. A earns the same accounting profit and more economic profit as B does.

C. A earns the same accounting profit and the same economic profit as B does.

D. A earns more accounting profit and the same economic profit as B does.

E. A earns less accounting profit and less economic profit than B does.

Explanation / Answer

The lost rental income of $4,000 is an opportunity cost for A.

Economic cost for A = Total opportunity cost = $(4,000 + 50,000) = $54,000

Economic cost for B = Accounting cost + Implicit cost = $4,000 + $50,000 = $54,000

So, B has higher accounting cost than A, so B has lower accounting profit than A (or, A has more accounting profit than B). Both have same economic profit.

So correct option (D).

So, both have same economic costs, meaning that ceteris paribus,

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