Question

To pursue her goal of being a business owner, Mary left a job that paid $40,000 per year. At the end of her first year in business, her cash revenues summed to $90,000, and her explicit costs were $50,000. Also, in order to fund her business startup, Mary cashed in a $20,000 certificate of deposit that was providing a yield of 5%. Ceteris paribus, Mary's economic profit is:
a) $0
b) $1,000.
c) $40,000
d) -$1,000.

Answer 1

Answer:

The answer is: D) -$1,000

Explanation:

The formula for calculating economic profit is:

Economic profit = revenue - (explicit costs + implicit costs)

• Revenue = $90,000
• Explicit costs = $50,000
• Implicit costs = $40,000 (opportunity cost for not having her old job) + $1,000 (5% x $20,000)

Economic profit = $90,000 - ($50,000 + $41,000) = $90,000 - $91,000

Economic profit = -$1,000