Question

Suppose that Bob leaves a job that pays $50,000 per year in order to open a new sponge business. His insurance cost is $5,000, his material cost is $25,000, his lease payments are $10,000, and his sales revenue is $90,000. Bob's economic profit is:

Answer 1

Economic profit is $0

Step-by-step explanation:

Economic profit is sales revenue minus both explicit and implicit costs.

Explicit costs are the costs that involve actual cash movements,whereas the implicit costs are the costs or benefits forgone,for the benefits Bob had to forgo in order to run his own business such the salaries that could he could earn if he takes up an employment rather than self-employment.

Sales revenue $90,000

less explicit costs:

Insurance ($5,000)

Material costs ($25,000)

Lease payments ($10,000)

implicit cost:

Salaries forgone ($50,000)

Economic profit $0