Question

You decide to quit your $60,000-per-year job as an information technology specialist and illustrate children's books. At the end of the first year of illustrating, you have earned $20,000. You also spent $5,000 for paint and paper. Your economic profit in the first year as an illustrator is: –$40,000. $15,000. $20,000. –$45,000.

Answer 1

Answer:

- $45000

Explanation:

Economic profit is different from accounting profit in the sense that former also takes into consideration the implicit costs, also referred to as opportunity costs unlike the latter.

Economic Profit = Accounting profit - Opportunity Costs

Opportunity costs are defined as the the cost of sacrificed or foregone alternative for pursuing a particular alternative. Such costs are implicit or notional as they are not actually incurred.

In the given case, Economic Profit = Revenues - Explicit costs - Implicit costs

Here, the implicit cost is $60,000 income foregone.

Thus, Economic Profit = $20,000(income) - $ 5000 (expense) - $60,000 (opportunity cost)

Economic Profit = ($ 45,000) or -$45,000.