Hiro owns and operates a small business that provides...

Hiro owns and operates a small business that provides economic consulting services. During the year he spends $\$ 57,000$ on travel to clients and other expenses. In addition, he owns a computer that he uses for business. If he didn't use the computer, he could sell it and earn yearly interest of $\$ 100$ on the money created through this sale. Hiro's total revenue for the year is $\$ 100,000$. Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of $\$ 50,000$. a. What is Hiro's accounting profit? b. What is Hiro's economic profit? c. Should Hiro continue working as a consultant, or should he teach economics instead?

Hiro owns and operates a small business that provides economic consulting services. During the year he spends $\$ 57,000$ on travel to clients and other expenses. In addition, he owns a computer that he uses for business. If he didn't use the computer, he could sell it and earn yearly interest of $\$ 100$ on the money created through this sale. Hiro's total revenue for the year is $\$ 100,000$. Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of $\$ 50,000$.
a. What is Hiro's accounting profit?
b. What is Hiro's economic profit?
c. Should Hiro continue working as a consultant, or should he teach economics instead?

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Key Concepts

Accounting Profit

Accounting profit is defined as total revenue minus explicit, out-of-pocket expenses. It does not consider opportunity costs or any costs that do not involve direct cash outlays. This measure is commonly used in financial accounting and tax reporting to assess the monetary gain from business operations.

Economic Profit

Economic profit takes into account both explicit costs and implicit costs, which include opportunity costs such as forgone income and interest. It represents the true profitability of a business by reflecting the value of all resources used in production, including those that could have been employed elsewhere.

Opportunity Cost

Opportunity cost is the cost of forgoing the next best alternative when making a decision. It includes both the foregone income from other opportunities and the implicit benefits that could be earned if resources, such as time and assets, were allocated differently. This concept is central in economic analysis for evaluating the true cost and benefits of any decision.

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