Question

Suppose that a small business takes in monthly revenue of $100,000. Labor, rental, energy, and other purchased input costs are $70,000. The owner/entrepreneur could earn $5,000 per month in another job, and the owner/entrepreneur could get a return of $5,000 each month if she sold her business and invested the net proceeds in a financial asset, such as a treasury bond. Which of the following correctly describes her monthly economic profit

Answer 1

The answer is: $20,000

Step-by-step explanation:

Economic profit can be calculated using the following formula:

Economic profit = total revenues - (explicit costs + implicit costs)

• total revenue = $100,000
• explicit costs = $70,000
• implicit costs = $5,000 (opportunity cost of another job) + $5,000 (opportunity cost of another investment) = $10,000

Economic profit = $100,000 - ($70,000 + $10,000) = $20,000