Question

Jane decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jane's economic profit from running her own business?

Answer 1

Jane's economic profit is $5,000.

Step-by-step explanation:

Jane decides to open a business of her own and earns an accounting profit of $50,000 in the first year.

She turned down three job offers with salaries of $30,000, $40,000, and $45,000 to start her business.

Here, the opportunity cost of doing business is $45,000 as the opportunity cost is the cost of giving up the second-best alternative.

The accounting profit does not consider implicit or opportunity cost. But in the calculation of economic profits, the implicit cost is considered.

Economic profits

= Accounting profit - Implicit cost

= $50,000 - $45,000

= $5,000