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.

Answer 1

Answer:

Check the following analysis

Explanation:

Part a.

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

Part b.

Based on the previous analisis you would advise her to continue working on his job.