Question

The sole proprietor of the Milwaukee Machine Company receives all accounting profits earned by her firm. She has a standing salary offer of $35,000 a year to work for a large corporation. If she had invested her capital outside her own company, she estimates that would have returned $22,000 this year. If accounting profits for the year were $50,000, then her economic profits werea. $0b. $7,000c. $21,000d. $50,000

Answer 1

Answer:

The correct answer is option b.

Explanation:

The sole proprietor of the Milwaukee Machine Company receives all accounting profits earned by her firm.

The accounting profits for the year were $50,000.

She has a standing salary offer of $35,000 a year to work for a large corporation. If she had invested her capital outside her own company, she estimates that would have returned $22,000 this year.

These two are the implicit or opportunity cost of doing business.

The accounting profits considers only explicit cost not implicit cost. To calculate economic profits we need to deduct implicit costs from accounting profits.

Economic profits

= Accounting profits - Implicit costs

= $50,000 - $35,000 - $22,000

= - $7,000