Question

Darrell is the owner of a furniture store. Last year, his total revenue was $525,000 and his total labor costs were $200,000. His overhead expenses, including insurance and legal fees, were $175,000. The rent on his building was $45,000. Darrell could earn $105,000 per year working at a nearby furniture distributor. If his total revenue increases to $600,000 this year and all of his other expenses are held constant, we know that his economic profit is now: Group of answer choices

Answer 1

$600,000

Step-by-step explanation:

Economic profit is accounting profit less implicit cost or opportunity cost.

Opportunity cost is the cost of the next best option forgone when one alternative is chosen over other alternatives.

Economic profit = Accounting profit - Opportunity cost

Accounting profit is total revenue less total cost.

Accounting profit = total revenue - total cost

Total revenue = $525,000 + $600,000 = $1,125,000.

Total cost = $175,000 + $45,000 + $200,000 = $420,000

Opportunity cost = $105,000

Accounting profit = $1,125,000 - $420,000 = $705,000

Economic profit = $705,000 - $105,000 = $600,000

I hope my answer helps you