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Determining equations for accounting and economic profits

Three college students consider the option of forming a lawn care and landscaping business during their summer vacation. They estimate the following costs:

Insurance $2,600
Equipment Rental Fees 1,000
Fuel and Supplies $4 per lawn
Miscellaneous Expenses $2 per lawn

Their projected revenue depends on the number of lawns serviced. The price per job is $30. The going wage for a typical unskilled college student is about $2,400 for the summer months. Let Q = the number of lawns serviced.

a) Derive an equation for total accounting profit.
b) Derive an equation for total economic profit.
c) Realistically, the small business should expect to service about 200 lawn jobs during the summer. Should the three students launch the business? Explain your answer in terms of economic and accounting profit.

Solution Preview

a) Derive an equation for total accounting profit.
Explicit costs=Insurance+ Equipment Rental fees+ Fuel and other supplies+ Misc. Expanses
=2600+1000+4Q+2Q
=3600+6Q
Total Revenue=Price Per job*number of lawns serviced=30*Q=30Q
Accounting profit=Total Revenue-Explicit costs
...

Solution Summary

Solution determines the equations for accounting and economic profits in the given case.

$2.19