Last year, jarod left a job that pays $60,000 to run his own bike-repair shop. jarod’s shop charges $65 for a repair, and last year the shop performed 3,000 repairs. jarod’s production costs for the year included rent, wages, and equipment. jarod spent $50,000 on rent and $100,000 on wages for his employees. jarod keeps whatever profit the shop earns, but does not pay himself an official wage. jarod borrowed $20,000 for the shop’s equipment at an annual interest rate of 5 percent. a. what is jarod’s accounting profit? b. what is jarod’s economic profit?

Jarod accounting profit and economic profit is $45,000 and ($16,000) respectively.

Accounting profit is also called the financial profit because it is derived after the subtraction of all dollar costs from total revenue.

Accounting profit = (Price charge for repair × No. of repairs) - (Rent + wages)

Accounting profit = ($65 × 3,000) - ($50,000 + $100,000)

Accounting profit = $195,000 - $150,000

Accounting profit = $45,000

Economic profit is basically the profit from producing of goods and services.

Economic profit = Accounting profit - Previous job earnings + Interest on equipment

Economic profit = $45,000 - ($60,000 + $20,000×5%)

Economic profit = $45,000 - $61,000

Economic profit = -$16,000

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