You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual costs of $150,000 for labor, $40,000 for rent, and $30,000 for equipment. There is a one-half probability that revenues will be $200,000 and a one-half probability that revenues will be $400,000.
a. In the low-revenue situation, what will your accounting profit or loss be? In the high-revenue situation?
Profits in the lower-revenue case
Profits in the higher-revenue case
b. On average, how much do you expect your revenue to be? Your accounting profit? Your economic profit?
Revenues
Accounting profits
Economic profits
c. Suppose the government imposes a 25-percent tax on accounting profits. This tax is only levied if a firm is earning positive accounting profits.
What will your after-tax accounting profit be in the low-revenue case?
In the high-revenue case?
What will your average after-tax accounting profit be?
What about your average after-tax economic profit?