Question

During its only year of operation, a firm collected $175,000 in revenue and spent $50,000 on raw materials, labor, and utilities. The owners of the firm spent $100,000 of their own money to build the firm's factory (instead of buying bonds and earning a 10% annual rate of return), which they sold at the end of the year for $100,000. The firm's economic profit is:

Answer 1

The answer is: $115,000

Step-by-step explanation:

Economic profit can be determined by the following formula:

economic profit = Revenues - (Explicit Costs + Implicit Costs)

where:

• revenues = $175,000
• explicit costs = $50,000
• implicit costs = 10% of $100,000 = $10,000

Economic profit = $175,000 - ($50,000 + $10,000) = $175,000 - $60,000

Economic profit = $115,000