Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year. At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit?

a. - $150,000

b. - $50,000

c. - $25,000

d. $25,000

Question

Business

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2 April, 19:01

Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year. At the end of the first year of operating his new business, Victor's accountant reported an accounting profit of $150,000. What was Victor's economic profit?

a. - $150,000

b. - $50,000

c. - $25,000

d. $25,000

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Answers (1)

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Karen Mitchell · Answer 1

Answer: c.) - $25,000

Explanation:

Economic profit = Accounting profit - opportunity cost

Accounting profit = $150,000

Estimated return on bond investment = $100,000

Job earning = $75,000

Total opportunity forgone = (estimated return on bond investment + job earning)

Total opportunity forgone = $ (100,000 + 75,000) = $175,000

Therefore, Victor's Economic profit equals:

$150,000 - $175,000 = - $25,000