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16 July, 02:51

Joe quits his computer programming job, where he was earning a salary of $50,000year, to start his own computer software business in a building that he owns and was previously renting out for $24,000/year. In his first year of business he has the following expenses: salary to himself, $40,000; rent, $0; other expenses, $25,000.

Find the accounting cost and economic cost associated with Joe's computer software business.

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  1. 16 July, 04:18
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    Accounting costs are simply the costs which are directly related to the business and can be easily quantified

    In this case the accounting expenses to the business are 40,000 salary and 25000 other expenses.

    On the other hand economic expenses include all accounting expenses plus opportunity costs of doing the business or the revenue forgone because of doing the business so in this case economic costs include 24000 a year rent that he was getting on the building and the 10,000 (50,000-40,000) salary that he was making.
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