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

Answer 1

$-2000

Step-by-step explanation:

Economic profit = accounting profit - opportunity cost

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

if i hadn't quit my job, i would be earning $30,000. so, $30,000 is one of my opportunity costs.

also, if i hadn't started my business, i would be earning 0.1 x $70,000 = $7,000 on my capital. this is my second opportunity cost.

total opportunity cost = $7,000 + $30,000 = $37,000

economic profit = $35,000 - $37,000 = $-2000