Zach took $200,000 out of the bank and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 17,000 boxes of cookies for $5 per box. Also, during the first year, the cookie business incurred costs amounting to $50,000.
a. What was Zach’s accounting profit for the year? (4 marks)
b. What was Zach’s economic profit for the year? (4 marks)
c. Should Zack continue with his cookie business? (2 marks)
d. A key difference between accountants and economists is their different treatment of the cost of capital. Does this difference result in an accountant’s estimate of total costs being higher or lower than an economist’s estimate? Explain your answer. (2 marks)