Question

Joan quit her job where she earned $50,000. She started a business by using $100,000 that she had just inherited instead of investing the money that could have earned 10% a year. The business had sales that equaled $250,000 the first year and expenses equal to $160,000. The economic profit for business for the first year was:A. $90,000.B. $30,000.C. $40,000.D. $80,000.

Answer 1

The correct option is b) $30,000

Step-by-step explanation:

Formula that we can use to take out the economic profit is =

ECONOMIC PROFIT =

REVENUE - EXPLICIT COST - IMPLICIT COST

In the given question the revenue is equal to $250,000

Explicit cost is the actual cost that business has incurred, that too is given in the question which is equal to $160,000

Implicit cost is the cost which Joan has sacrificed ( opportunity cost) which is $100,000 which she invested in business and instead she could have earned 10% interest on this as, 10% x $100,000 = $10,000

and the salary which she has left of $50,000 will also be included in the implicit cost, so the total implicit cost would be $60,000

ECONOMIC PROFIT =

$250,000 - $160,000 - $60,000

= $30,000