Question

An entrepreneur quits a job where she was paid $75,000 to set up her own business. the new firm had sales revenue of $300,000 last year, while spending $150,000 on compensation for employees, $25,000 on capital, and $25,000 on materials. what was the firm's economic profit?

Answer 1

Economic profits (or loss) is defined as the difference between revenues and the opportunity cost forgone. In the current case, the entrepreneur opted to start a business rather than being employed.

Therefore;
Economic profit = Revenues - Opportunity cost

In this problem;
Revenues = $300,000 - $150,000 - $25,000 - $25,000 = $100,000
Opportunity cost = $75,000

Therefore;
Economic profit = $100,000 - $75,000 = $25,000