Question

Suppose an assistant professor of economics is earning a salary of ​$75 comma 000 per year. One day she quits her​ job, sells ​$110 comma 000 worth of bonds that had been earning 5 percent per​ year, and uses the funds to open a bookstore. At the end of the​ year, she shows an accounting profit of ​$85 comma 000 on her income tax return. What is her economic​ profit? Her economic profit for the year is ​$ nothing ​(round your answer to the nearest​ dollar

Answer 1

The economic profit from the bookstore is $4,500.

Step-by-step explanation:

An assistant professor of economics is earning a salary of $75,000 per year.

She decides to quit her job, sells bonds worth $110,000 that had been earning 5 percent per​ year, and uses the funds to open a bookstore.

She earns an accounting profit of $85,000 at the end year.

The accounting profit involves only the explicit cost of production. It does not consider the implicit cost. The implicit cost or opportunity is considered in calculating economic profits.

Implicit costs involved

= $75,000 + 5% of $110,000

= $75,000 + $5,500

= $80,500

Economic profits

= Accounting profits - Implicit costs

= $85,000 - $80,500

= $4,500