Question

Suppose that you open your own business and earn an accounting profit of​ $35,000 per year. When you started your​ business, you left a job that paid you a​ $30,000 salary annually.​ Also, suppose that you invested​ $70,000 of your own funds to start up your business.

If the normal rate of return on capital is 10​ percent, your economic profit is


A. minus​$5,000.

B. minus​$2,000.

C. ​$5,000.

D. ​$2,000.

Answer 1

B. minus​$2,000.

Step-by-step explanation:

The computation of the economic profit is shown below:

As we know that

Economic profit = Total revenue - Explicit costs - Implicit costs

= $35,000 - $30,000 - $7,000

= -$2,000

The implicit cost is come from

= $70,000 ×10%

= $7,000

We simply applied the above formula so that the economic profit could come