Question

You turned down a at ABC Corplast year that would have paid you \$125,000 per year and started your own companyWhen you calculated your economic profit it came out at $0. You expect the business will be exactly the same next year ABC called and said you could still take the jobWhat shou you do- keep running your company as-is, or go running back to the job!?

Answer 1

Economic Profit includes the effect of opportunity cost. So when the economic profit was calculated, the opportunity cost of $125,000 was subtracted from the accounting profit to reach the economic profit of zero.

So the accounting profit was $125,000. Thus in terms of profit, both the opportunities are basically same. However, accounting profits means that all expenses are taken care of. So among those expenses there might be salaries or other expenses which would have been incurred separately if one had taken the job.

So it is better off to keep running the company than going to a job as long as the economic profit is $0.

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