You are currently a worker earning $60,000 per year but are considering becoming
ID: 2429468 • Letter: Y
Question
You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual costs of $150,000 for labor, $70,000 for rent, and $40,000 for equipment. There is a one-half probability that revenues will be $220,000 and a one-half probability that revenues will be $430,000.
Instructions: For all parts, enter a loss as a negative number. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers.
a. In the low-revenue situation, what will your accounting profit or loss be? $.
In the high-revenue situation, what will your accounting profit or loss be? $.
b. On average, how much do you expect your revenue to be? $ per year.
Your accounting profit? $ per year.
Your economic profit? $ per year.
Will you quit your job and try your hand at being an entrepreneur? (Click to select)YesNo.
c. Suppose the government imposes a 25 percent tax on accounting profits. This tax is only levied if a firm is earning positive accounting profits.
What will your after-tax accounting profit be in the low-revenue case? $.
In the high-revenue case? $.
What will your average after-tax accounting profit be? $.
What about your average after-tax economic profit? $.
Will you now want to quit your job and try your hand at being an entrepreneur? (Click to select)YesNo.
d. Other things equal, does the imposition of the 25 percent profit tax increase or decrease the supply of entrepreneurship in the economy? (Click to select)DecreaseIncrease.
Explanation / Answer
1) Accounting profit / loss in the low-revenue situation: -$20,000
Accounting profit / loss in the high-revenue situation: $180,000
Working:
Explicit costs = $150,000 + $40,000 + $30,000 = $220,000
Accounting profits:
Lower-revenue case: $200,000 - $220,000 = -$20,000
Higher-revenue case: $300,000 - $220,000 = $180,000
2) Average revenue: $300,000 per year
Accounting profit: $80,000 per year
Economic profit: $20,000 per year
Yes, you will want to quit your job to become an entrepreneur
Working:
Average revenue = 0.5X$400,000 + 0.5X$200,000 = $300,000
Accounting profit: =Average revenue - Explicit costs
= $300,000 - $220,000
= $80,000
Economic profit: Average accounting profits - Opportunity costs of foregone wages
= $80,000 - $60,000
= $20,000
3) After-tax accounting profit in the low-revenue case: -$20,000
After-tax accounting profit be in the high-revenue case: $135,000
Average after-tax accounting profit: $57,500
Average after-tax economic profit: -$2,500
No, you will you now want to quit the job and try the hand at being an entrepreneur?
Working:
After-tax accounting profit:
Low-revenue case: -$20,000
High-revenue case: 0.75* $180,000 = $135,000
Average after-tax accounting profit: 0.5X(-$20,000) + 0.5X$135,000 = $57,500
Average after-tax economic profit: Average after-tax accounting profit - Foregone wages
= 57,500 - 60,000
= -$2,500
4) Solution: Decreases
Working: The profit tax reduces the supply of entrepreneurship in the economy
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.