Question

Gerry works 40 hours a week managing Gerry’s Market, without drawing a salary. He could earn $600 a week doing the same work for Jean. Gerry’s Market owes its bank $100,000, and Gerry has invested $100,000 of his own money. If Gerry’s accounting profits are $1,000 per week while the interest on his bank debt is $200 per week, his economic profits are:

Answer 1

The correct response is "$395 per week".

Step-by-step explanation:

Given:

Salary forgone,

= $600

Dividend forgone,

= $5

Accounting profit,

= $1,000

Now,

The implicit cost will be:

=
`Salary \ forgone+Dividend \ forgone`

By substituting the values, we get

=
`600+5`

=
`605` ($) per week

hence,

The economic profit will be:

=
`Accounting \ profit-Implicit \ cost`

=
`1000-605`

=
`395` ($) per week