You and your best friend are brilliant entrepreneurs who are considering opening your own business tutoring struggling college students in economics. This wonderful endeavor takes the place of the job you were offered working for a rival tutoring service and earning $4,000 a month. Your best friend was offered a similar job at $3,000 (better not tell him about your offer!). Operating expenses for your tutoring business will total $6,000 monthly when you include variable costs such as hiring other tutors. Additionally you will need to lease a building to work out of for $3,000 per month. Together the two of you have enough to cover these operating expenses and the lease but if you pull that money out of your bank accounts you will lose out on $500 in interest income you could have collectively earned. You anticipate revenue from your tutoring business will be $12,000 per month, (medium) What would be the accounting profit/loss per month for your business? What would be the economic profit/loss per month for your business? Should you and your friend open the business? Why or why not?

It is not in their best interest to open the business. It will destroy capital as they will earn more income from the factor alone than combined into this project.

It is better to accept the offers and put the savings to yield interest unti la better project presents or reconsider the project to make it profitable.

Explanation:

Accounting result (explicit cost only)

average revenue 12,000

monthly expenses (6,000)

building lease (3,000)

accounting profit 3,000

Economic result: Accounting revenue less opportunity cost of the factor.

accounting profit 3,000

labor factor (7,000) sum of both yours and friend offers

capital factor (500) interest from the saving

economic loss 4,500