Abby quit her $50,000 per year job to start her own business. In the first year,

Question

Abby quit her $50,000 per year job to start her own business. In the first year, her business received $200,000 in revenue, with the following costs: $100,000 in wages to her employees, $20,000 on miscellaneous materials used in her business, and $20,000 on electrical, gas, and water usage. Abby also used $50,000 of her personal savings to purchase equipment for her business. She was earning 10 percent interest on her savings. Assuming no depreciation in the value of the equipment, Abby's business earned an economic profit for the year of $60,000 -$45,000 -$40,000 $55,000 $5,000

Explanation / Answer

Economic Profit = Total Revenue - Total cost including explicit and implicit cost

Explicit cost = 100,000 + 20,000 + 20,000 = 140,000

Implicit cost = Revenue sacrificed to start business = 10% of 50,000 + 50,000(salary) = 55,000

Economic Profit = 200,000 - [140,000 + 55,000] = 200,000 - 195,000 = $ 5000

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