Question
Kate quit her job, where she earned $120,000 per year, to start her own financial consulting...
Kate quit her job, where she earned $120,000 per year, to start her own financial consulting firm. She invested $80,000 of her own funds in furniture, computers, and other assets. During the first year of operation, the firm’s costs were $80,000 for rent on the office building, $420,000 for wages and salaries of employees, and $11,000 for supplies and utilities. The market value of the firm’s assets at the end of the year was $60,000. During the year, the firm billed its clients for 2,700 hours at $250 per hour. The typical rate of return on financial investments in the economy was 8%.
Question 1
In the scenario above, what was Kate's explicit cost ($)?
Numeric Answer:
Question 2
In the scenario above, what was Kate’s cost of capital ($)?
Numeric Answer:
Question 3
In the scenario above, what was Kate’s economic profit ($)?
Numeric Answer:
Question 4
In the scenario above, if Kate earned $130,000 per year at her previous job, what would be her economic profit ($)?
Answers
1. Explicit cost = Rent + wages + supplies = 80000 + 420000 + 11000 = 511000
2. Cost of capital = interest forgone on invested amount = 8% * 80000 = 6400
3. Economic profit = Revenue - explicit cost - implicit cost
= 2700 * 250 - 511000 - 6400 - 120000
= 37600
4. Economic profit = Revenue - explicit cost - implicit cost
= 2700 * 250 - 511000 - 6400 - 130000
= 27600
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