Question

Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn’t opened her own business, she would have earned a salary of $25,000. In her first year, Bev’s revenues were $30,000. Which of the following statements is correct?
a.Bev’s accounting profits exceed her economic profits by $300.
b.Bev’s total explicit costs are $25,300.
c.Bev’s total implicit costs are $300.
d.Bev’s economic profit is $4,700.

Answer 1

Answer:

Option (d) is correct.

Explanation:

Here, the implicit cost is as follows:

Interest income she would have earned = $300

She would have a salary = $25,000

Total revenue from the business = $30,000

The total opportunity cost is as follows:

= Interest income + salary amount

= $300 + $25,000

= $25,300

Therefore,

Economic profits:

= Total revenue - Total Cost

= $30,000 - $25,300

= $4,700

Therefore, the Bev’s economic profit is $4,700.