Question

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The economic profits of Harvey's firm in the first year were:a) $160,000b). $280,000.c) $155,000.d) $220,000.

Answer 1

Answer:

option (a) $160,000

Explanation:

The economic profit is calculated as:

Economic profit = Total revenue - ( Explicit cost - Implicit cost )

Now,

Total revenue = Units sold × Unit price

= 11,000 × $75

= $825,000

Explicit cost = Units sold × Per unit cost of production

= 11,000 × $55

= $605,000

also,

Harvey quit his job at State University where he earned $45,000 a year

foregone entrepreneurial income to be $5,000 a year

To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company

Therefore,

Implicit cost = $45,000 + $5,000 + ( 10% of $100,000 )

= $50,000 + $10,000

= $605,000

Hence,

Economic profit = $825,000 - ( $605,000 - $605,000 )

= $160,000

so the correct answer is option (a) $160,000