Question

Monica quit her $50,000 per year job, purchased a building that was previously rented by the operator of a candy store for $1,500 per month, and used the space to breed and sell tropical fish. In her first year she made a business profit of $60,000. What was her economic profit? A. She had an economic loss of $8,000. B. $10,000 C. $42,000 D. Her economic profit was the same as her business profit.

Answer 1

Answer: She had an economic loss of $8,000.

Explanation:

Economic profit = Accounting profit - Opportunity cost

Accounting profit = Revenue - Total Cost.

Monica's Opportunity cost is the amount she would have been earning if she didn't start her business. It is $50,000.

Total cost = $1500 × 12 = $18,000

Accounting profit = $60,000 - $18,000 = $42,000

Economic loss = $42,000 - $50,000 = $ -8000