Question

A small business owner earns​ $50,000 in revenue annually. The explicit annual costs equal​ $30,000. The owner could work for someone else and earn​ $25,000 annually. The​ owner's business profit is​ ________ and the economic profit is​ ________.

Answer 1

The owner's business profit is $20,000 and the economic profit is -$5000

Step-by-step explanation:

First of all the owner's business profit can also be termed as the accounting profit, which means the total amount of revenue that a firm generates after paying off the explicit cost of the business which usually includes purchase of raw material or the wages of employee.

Economic profit is almost same as owner's business profit with only difference being that in the calculation of economic profit, the total cost of production is taken, which means that both explicit and implicit cost are taken it to account. Implicit cost means the opportunity cost that a firm losses by choosing one avenue over the other.

OWNERS BUSINESS PROFIT = TOTAL REVENUE - EXPLICIT COST

= $50,000 - $30,000

= $20,000

ECONOMIC PROFIT = TOTAL REVENUE - EXPLICIT COST- IMPLICIT COST

( IMPLICIT COST = OPPORTUNITY COST)

Here the opportunity cost would be $25,000 because business owner is now working for someone else, losing the opportunity to earn more from his business.

ECONOMIC PROFIT = $50,000 - $30,000 - $25,000

= -$5000