If they paid themselves $10,000 annually each, and rented an office for $18,000 per year. prior to the investment, their $50,000 was in bonds earning interest at a rate of 10 percent. The economic profits is $43,000.
<h3>How to find the economic profits?</h3>
First step is to find the opportunity cost per year
Opportunity cost = $60, 000 /2
Opportunity cost = $30 000
Second step is to find the opportunity cost of their capital in bond and the total opportunity cost
Opportunity cost = 10% × $50,000
Opportunity cost =$5,000
Total opportunity cost = $60,000+$5,000
Total opportunity cost =$65,000
Third step is to find the total net profit
Total net profit=$40,000- $18,000
Total net profit =$22,000
Now let find the economic profit using this formula
Economic profit = Net profit- opportunity cost
Economic profit = $22,000-$65, 000
Economic loss = $43,000
Therefore the amount of $43,000 is the economic profit
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