2 former students worked in an investment bank at a salary of $60,000 each for 2

Question

2 former students worked in an investment bank at a salary of $60,000 each for 2 years after they graduated. together they saved $50,000. After 2 years, they decided to quit and start a business.  they used the $50,000 to buy computer equipment, desks, and chairs.  for the next 2 years they took in $40,000 in revenue each year, paid themselves $10,000 annually each, and rented an office for $18,00 per year.  prior to the investment, their $50,000 was in bonds earning intrest at a rate of 10 percent.  Are they now earning economic profits? Explain your answer please.

Explanation / Answer

So what is the economic profit of working indepently insteadof working for a company we need to calculate the overall profit for workingindependtly. So for the years which they worked on their own company: Revenue: 40,000*2=80,000 Expense: Rent=18,000 Salary=10000*2=20,000 80,000-18,000 =$62,000 instead they could've made (opportunity cost) $60,000+$60,000=$120,000 per person for 2 years plus the $5000(1+0.1)^2 So, it si not good for them to quit their jobs. It can be seenthat they are not making much money.

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