Work It Out, Chapter 9, Step 2

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
The next part of the problem asks you to find the economic profit.

(Description)
The following text is written: Hiro owns and operates a small business that provides economic consulting services. During the year he spends 57 thousand dollars 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 dollars on the money created through this sale. Hiro's total revenue for the year is 100 thousand dollars. Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of 50 thousand dollars. b. What is Hiro's economic profit?

(Speaker)
It is important to understand the difference between accounting and economic profit. The key difference is that economic profit accounts for both explicit and implicit costs.

(Description)
The following text is written below the previous one: Economic profit is equal to total revenue minus opportunity cost of resources used.

(Speaker)
Economists care about opportunity cost. For the case of Hiro, when calculating economic profit he needs to include as a cost the lost salary from his teaching job, 50 thousand dollars, and the lost interest he would earn from selling his computer, 100 dollars.

(Description)
The following text is written below the previous one: When calculating economic profit we can start with accounting profit and subtract out the value of Hiro's next best alternative which includes the salary and interest earning he must give up.

(Speaker)
Hiro's economic profit is found by subtracting these implicit costs from his accounting profit. Hiro's economic profit is negative 7 thousand 100 dollars, which is found by subtracting 50 thousand dollars and 100 dollars from 43 thousand dollars.

(Description)
The following text is written below the previous one: Hiro's economic profit is negative 7 thousand 100 dollars (43 thousand dollars minus 50 thousand dollars minus 100 dollars).