Question

Robert withdrew $100,000 from an account that paid 10 percent annual interest and used the funds to purchase real estate. After one year he sold the property for $120,000. Robert's economic profit on this deal was:

Answer 1

$10,000.

Step-by-step explanation:

The economic profit by Robert is $10,000. this is calculated below.

The amount withdrawn and invested = $100,000

Cost of property sold = $120,000

Profit from the sale of the property = $20,000

Amount made if he had not withdrawn the money = $110,000

Profit if he had not withdrawn the money = $10,000

Economic profit = $20,000 - $10,000

= $10,000

The opportunity cost of $10,000 (foregone interest) must be included to determine economic profit.