Question

I started a business last year. My revenues were $100,000. My rent and materials costs were $60,000. My best alternative was and is to go to work for a company in a job that would pay me $30,000. The "true" profits from my business were ______.a. $10,000b. $30,000c. $40,000d. $90,000e. $240,000

Answer 1

Answer: $10,000

Explanation: True profits are the profits which takes into consideration the opportunity cost of choosing an alternative. Opportunity cost refers to the loss of profit incurred by a firm or an individual while choosing best alternative over the second best alternative.

In the given case, the individual could have earned $30,000 from the job so it is his opportunity cost that must be deducted from the revenues to ascertain the profit. That is :-

Profit = revenue - materials - opportunity cost

= $100,000 - $60,000 - $30,000

= $10,000