Question

As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit it her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.

At the end of the first year of operating her new business, Mary's accountant reported an accounting profit of $150,000. What was Mary's economic profit?

a. $25,000 loss
b. $50,000 loss
c. $25,000 profit
d. $150,000 profit 13.

Answer 1

a. $25,000 loss

Step-by-step explanation:

Economic profit = revenues - explicit costs - opportunity costs

In this case, Mary's economic profit = profit from investment in new business - opportunity cost of not investing $1 million in risk-free bond - opportunity cost of quitting job

= $150,000 - $100,000 - $75,000

= ($25,000)