Question

Until recently, Rosemarie worked as an accountant, earning $30,000 annually. Then she inherited a piece of commercial real estate that had been renting for $12,000 annually. Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is:

Answer 1

Answer:

 $-12,000

Explanation:

Economic profit is accounting profit less implicit cost or opportunity cost.

Economic profit = Accounting profit - Opportunity cost

Accounting profit = total Revenue - total Cost

$260,000 - $230,000 = $30,000

Opportunity cost is the cost of the next best option forgone when one alternative is chosen over other alternatives.

The opportunity cost of Rosemarie starting her own restaurant is the salary she woold have been earning if she didn't leave her job = $12,000

Also the opportunity cost of using the space she inherited is the rent that would have been paid if she didn't use it as a restaurant = $30,000

Total opportunity costs = $30,000 + $12,000 = $42,000

Economic profit = $30,000 - $42,000 = $-12,000

I hope my answer helps you

Answer 2

Answer:

She actually made an economic loss of $12,000

Explanation:

The economic profit is considers the opportunity cost  while the accounting profit does not. The cost of the alternatives forgone is deducted from the explicit cost in the determination of economic profit.

As such, while the accounting profit would be the revenues less the total cost, the economic profit would be computed a step further by deducting the  salaries she would have earned and the rental income on the real estate if it had been rented out.

Economic profit = $260,000 - $230,000 - $30,000 - $12,000

= -$12,000