Question

1. Josh quits his job as a highly-paid college professor, earning $60,000 a year, in order to start a consultancy business. In his first year, his revenue is $200,000. His payments to suppliers of resources come to $85,000. His economic profit is ____________.

A. $115,000 B. $55,000 C. $165,000 D. zero (as he is making a loss)

2.Sydney earned an annual income of $90,000 for a local employer. She quits her job and sets up a rival company. Her annual expenses include $30,000 to rent her premises, $6,000 for the rent on equipment, and a salary of $30,000 for office help. To help finance the new business, she cashes in a bond worth $10,000 that had an annual interest payment of $500. In its first year, Sydney’s firm has $130,000 in revenue. Sydney’s economic profit is _________.

A. $63,500 B. $26,500 C. -$26,500 D. $39,500

3. Sydney earned an annual income of $90,000 for a local employer. She quits her job and sets up a rival company. Her annual expenses include $30,000 to rent her premises, $6,000 for the rent on equipment, and a salary of $30,000 for office help. To help finance the new business, she cashes in a bond worth $10,000 that had an annual interest payment of $500. In its first year, Sydney’s firm has $130,000 in revenue. Sydney’s accounting profit is ________.

A. $40,000 B. $64,000 C. -$26,500 D. $16,500

4. Sydney earned an annual income of $90,000 for a local employer. She quits her job and sets up a rival company. Her annual expenses include $30,000 to rent her premises, $6,000 for the rent on equipment, and a salary of $30,000 for office help. To help finance the new business, she cashes in a bond worth $10,000 that had an annual interest payment of $500. Sydney’s explicit costs are ________.

A. $60,000, B. $66,000 C. $156,000 D. $166,000

Answer 1

1. B. 55,000

reason: Economic profit = revenue - (explicit cost + implicit cost)

Josh's revenue = 200,000

HIs explicit expense = 85,000

HIs implicit expenses = 60,000

So, his economic profit = 200,000- (85,000 + 60,000) = 55,000

2. C. -$26,500

reason: Economic profit = revenue - (explicit cost + implicit cost)

Sydney's revenue = 130,000

Her explicit cost = (30,000 + 30,000 + 6,000) = 66,000

Her implicit cosst = (90,000 + 500) = 90,500

So, her economic profit = 130,000 - (66,000+90,500) = -26,500 (loss)

3. B. $64,000

reason: Accounting profit = Revenue - expilcit cost

= 130,000 - 66,000 = 64,000

4. B. 66,000

reason: Explicit costs are out-of -pocket expenses. These are:  

$30,000 to rent her premises,

$6,000 for the rent on equipment, and

$30,000 as salary of for office help

total explicit cost = 66,,000