Question

James used $200,000 from his savings account that paid an annual interest of 10% to purchase a hardware store. After one year, James sold the business for 300,000. His economic profit is:

Answer 1

His Economic profit = $80,000

Step-by-step explanation:

Economic profit/interest is the extra amount earned or lost (negative economic profit) in making an economic decision, as opposed to another available alternative.

To calculate James' economic profit, let us calculate how much interest would have been yielded should he have left the $200,000 in his savings. This is done as follows:

Annual interest on savings = 10% = 10/100 = 0.1

Annual interest on savings = 0.1 × 200,000 = $20,000

Hence, if James had left the money in the savings account, after one year, he would have had:

200,000 + interest = 200,000 + 20,000 = $220,000

After selling the hardware store, he had $300,000

∴ James' economic profit = 300,000 - 220,000 = $80,000