Question

Scenario 14-4 Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year. Refer to Scenario 14-4. At the end of the first year of operating his new business, Victor’s accountant reported an accounting profit of $150,000. What was Victor’s economic profit?

Answer 1

Economic Profit of Victor would amount to -$25,000

Step-by-step explanation:

The formula to compute the economic profit is as follows:

Economic Profit (EP) = Total Revenue - (Opportunity Cost + Explicit Cost)

where,

Revenue is $150,000

Opportunity Cost is $100,000

Explicit Cost is $75,000

By putting the values in the formula

EP = $150,000 - ($100,000 + $75,000)

= $150,000 - $175,000

= -$25,000