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18 January, 16:27

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.

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Answers (1)
  1. 18 January, 19:52
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    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
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