Question

Habib withdrew $100,000 from his bank account paying 5% interest to purchase equipment for his construction company. If Habib earns an accounting profit of $10,000 and he has no other opportunity costs, his economic profit will be equal to:_____.

Answer 1

Answer:

$5,000

Explanation:

Data given in the question is

Withdrawn amount = $100,000

Interest rate = 5%

Accounting profit = $10,000

So, by considering the above information, the economic profit is

= Accounting profit - Withdrawn amount × interest rate

= $10,000 - $100,000 × 5%

= $10,000 - $5,000

= $5,000

The Withdrawn amount × interest rate reflect the opportunity cost

Answer 2

Answer:

$ 5000

Explanation:

Accounting Profit is excess of Total Revenue over Total Explicit Costs

Economic Profit is excess of Total Revenue over Total Implicit costs (including all opportunity costs)

Accounting Profit = 100000

Implicit Cost = Opportunity Cost = Interest at 100000 foregone  

= 5% at 100000 = 5000

Economic Profit = Accounting Profit - Implicit Costs

= 10000 - 5000

=  $  5000