Question

Adamis the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit?

A. Accounting profit = $175,000; economic profit = $75,000.
B. Accounting profit = $75,000; economic profit = negative $100,000.
C. Accounting profit = $0; economic profit = negative $75,000.
D. Accounting profit = $75,000; economic profit = $0.

Answer 1

Option D is correct: Accounting profit = $75,000; economic profit = $0.

Step-by-step explanation:

The correct answer is Option D: Accounting profit = $75,000; economic profit = $0.

Accounting profit is calculated by subtracting the explicit costs (e.g., wages, suppliers) from total revenue. In this case, it would be $250,000 - $175,000 = $75,000.

Economic profit takes into account both explicit and implicit costs. Implicit costs are the opportunity costs of not accepting other job offers. Since Adam was offered a maximum of $75,000 per year elsewhere, his economic profit would be $75,000 - $75,000 = $0.

Answer 2

A is the correct answer