Question

Sid has decided to leave his $70,000-a-year landscape design job and open a new kayak business. his insurance cost is expected to be $2,000 per year. the kayaks he owns are valued at $25,000, but he experiences 10% annual depreciation on them. he will also use building space that he owns, but, to do so, he must give up the $10,000 per year in rent he used to receive for the space. revenue is expected to equal $100,000 per year. sid's economic profit is:

Answer 1

Economic profit refers to the profit earned by deducting the implicit cost and the explicit cost from the total revenue.

Economic Profit = Total revenue - (Explicit cost + Impllicit Cost)

where Total Revenue = $100,000

Explicit Cost = $2000 + ($25000*10%) = $4500

Implicit Cost = $70000 + $10000 = $80000

Economic Profit = $100,000 - ($4,500 + $80,000)

Economic Profit = $100,000 - $84,500

Economic Profit = $15,500

Hence, Sid's Economic Profit is equal to $15,500