Question

Until recently Alex worked as an economist, earning $55,000 annually. Then she inherited a piece of commercial real estate that had been renting for $15,000 annually. Alex decided to leave her job and operate a brewpub in the real estate she now owns. At the end of the first year, her records showed total revenues of $340,000 and total payments of $230,000 for employees, utilities, and other supplies. Her economic profit at the end of one year is:

Question 1 options:

A)

$95,000.

B)

$40,000.

C)

$0.

D)

$110,000.

Answer 1

Answer 1

The correct answer is (B) $40,000

Formula:

Economic Profit = Total revenue - Explicit cost - Implicit cost

Given :

Total Revenue = $340,000

Explicit Cost = Cost to employees and other supplies + rent = 230,000 + 15,000 = $245,000

Implicit Cost is the income Alex forgone in order to start this business. Hence Implicit cost is the income that he could earn by working as an economist and had foregone that income in order to start his new business.

=> Implicit Cost = $55,000

Hence, Economic Profit = Total revenue - Explicit cost - Implicit cost

=> Economic Profit = 340000 - 245000 - 55000 = $40000

Hence, the correct answer is (B) $40,000