Question

Sid has decided to leave his $70,000-a-year landscape design job and open a new kayak business. His insurance cost is expected to be $2,000 per year. The kayaks he owns are valued at $25,000, but he experiences 10% annual depreciation on them. He will also use building space that he owns, but, to do so, he must give up the $10,000 per year in rent he used to receive for the space. Revenue is expected to equal $100,000 per year. Sid's economic profit is: $2,000 $15,500 $84,500 $82,500

Answer 1

The correct answer is $15,500.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

Revenue = $100,000

Insurance cost = $2,000

Design job leave = $70,000

Rent = $10,000

Annual depreciation = 10% × $25,000 = $2,500

So, we can calculate the economic profit by using following formula:

Economic Profit = Total Revenue - (Explicit cost + Implicit costs)

By putting the value, we get

= $100,000-($70,000 + $2,000 + $10,000 + $2,500)

= $15,500