Question

Suppose a sole proprietorship is earning total revenues of $100,000 and is incurring explicit costs of $75,000. If the owner could work for another company for $30,000 a year, we would conclude that:a. the firm is incurring an economic loss.

b. implicit costs are $25,000.
c. the total economic costs are $100,000.
d. the individual is earning an economic profit of $25,000.

Answer 1

a. the firm is incurring an economic loss.

Step-by-step explanation:

The computation of the economic profit is shown below:

= Total revenues - total cost

where,

Total cost would be

= explicit cost + implicit cost

= $75,000 + $30,000

= $105,000

The implicit cost reflects the opportunity cost i.e $30,000

So, the economic loss would be

= $105,000 - $100,000

= $5,000

Hence, there is an economic loss of $5,000