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, and she spent $1,000 on materials and supplies. Which of the following statements is correct?a) Bev's total explicit costs are $25,300.
b) Bev's total implicit costs are $300.
c) Bev's accounting profits exceed her economic profits by $300.
d) Bev's economic profit is $4,700.

Answer 1

Answer:

Bev's total explicit costs are $1000

Bev's total implicit costs are $25,300

Bev's accounting profits exceed her economic profits by $25,300

Bev's economic profit is $3,700.

Explanation:

Accounting profit is total revenue less total explicit cost.

Explicit cost is actual cost incurred.

Accounting profit = Total revenue - Total explicit cost

Total explicit cost = $1,000

Total revenue = $30,000

Accounting profit = $30,000 - 1,000 = $29,000

Economic profit is accounting profit less implicit cost or opportunity cost.

Opportunity cost is the cost of the next best option forgone when one alternative is chosen over other alternatives.

Implicit cost = $300 + $25,000 = $25,300

Economic profit = $29,000 - $25,300 = $3,700

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