Joe quits his computer programming job, where he was earning a salary of $50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the fol- lowing expenses: salary paid to himself, $40,000; rent, $0; other expenses, $25,000. Find the accounting cost and the economic cost associated with Joe’s computer software business.

Accounting cost= $65,000.

Economic cost = $99,000

Explanation:

Accounting costs represent all amount spent on transactions for the purchase of generate revenue. These are also known as explicit costs

Accounting cost for Joe =

40,000 + 25,000 = $65,000.

Economic costs on the other hand capture all accounting costs together with opportunity costs. Opportunity cost is the value of the next best alternative sacrificed in favor of a decision. Opportunity cost is also known as implicit cost

The opportunity cost for Joe includes

$10,000 reduction in salary he forfeited to start his business i.e ($50,000 - $40,000)

$24,000 rent he no longer receives .

Total opportunity cost = $10,000 +$24,000 = $34,000

Hence economic cost =  

= $65,000 + $34,000

=$99,000

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