Use the following information to answer the next question. Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The economic profits of Harvey's firm in the first year were:

a) $160,000.

b).$280,000.

c) $155,000.

d) $220,000.

Question

Business

Brennen Grimes

13 December, 10:45

Use the following information to answer the next question. Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The economic profits of Harvey's firm in the first year were:

a) $160,000.

b).$280,000.

c) $155,000.

d) $220,000.

+3

Answers (1)

Know the Answer?

Lesly · Answer 1

Answer: Option (a) is correct.

Explanation:

Total Revenue = Units sold * price per unit sold

= 11,000 * $75

= $825,000

Explicit cost = Units sold * cost per unit

= 11,000 * $55

= $605,000

Implicit cost = Earning at state university + Entrepreneurial talent + cash bonds at 10% interest

= $45000 + $5,000 + ($100,000 * 10%)

= $60,000

Economic profits = Total Revenue - (Explicit cost + Implicit cost)

= $825,000 - ($605,000 + $60,000)

= $825,000 - $665,000

= $160,000