Question

Francis wants to buy some paintings for their store to make it feel more classy. Francis would need to take $20,000 out of their savings account (which earns 1% interest a year) in order to finance the paint-ings. At the end of the year, Francis knows they could sell the paintings for $20,000 but they would choose not to. When calculating this year's economic profit, Francis would count this as a:

Answer 1

When calculating this year's economic profit, Francis would count this as a:

cost.

Step-by-step explanation:

Francis would include the opportunity cost of $20,000, which the paintings could have fetched, as part of the costs. The cost will also include the lost 1% interest or $200 a year. This means that, among other costs, the total cost includes $20,200. This is one distinguishing factor between economic profit and accounting profit. Economic profit includes lost opportunity revenues for alternative uses of the resource as costs unlike accounting profit.