Question

Imagine that you open your own business. In the first year your business generate $300,000 in revenues. You also incur various accounting costs associated with operating the business, such as the rental cost of the office, office equipment, licenses and so on. These accounting costs add up to $80,000. Also assume that in order to run this business you had to give up your previous job that paid $120,000/year. In the first year of operations, what was the economic profit?

Answer 1

Answer:

Economic profit= $100,000

Explanation:

Giving the following information:

In the first year, your business generates $300,000 in revenues.

Accounting costs add up to $80,000.

Also, assume that to run this business you had to give up your previous job that paid $120,000/year.

The economic value of the business must include the opportunity cost of leaving the previous job.

economic profit= 300000 - 80000 - 120000= $100,000