Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian's savings account paid 3 percent interest. He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase supplies and earned $50,000 in revenue during his first year. Which of the following statements is correct?
A)Sebastian's economic profit is $4,000, and his accounting profit is $34,600.
B)Sebastian's economic profit is $4,600, and his accounting profit is $35,000.
C)Sebastian's economic profit is -$16,000, and his accounting profit is $34,600.
D)Sebastian's economic profit is -$16,000, and his accounting profit is $14,600.

Question

​Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian's savings account paid 3 percent interest. He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase supplies and earned $50,000 in revenue during his first year. Which of the following statements is correct?
A)​Sebastian's economic profit is $4,000, and his accounting profit is $34,600.
B)​Sebastian's economic profit is $4,600, and his accounting profit is $35,000.
C)​Sebastian's economic profit is -$16,000, and his accounting profit is $34,600.
D)​Sebastian's economic profit is -$16,000, and his accounting profit is $14,600.

Quizplus · Accepted Answer

Sebastian's economic profit is $4,000, and his accounting profit is $34,600.Economic profit = Revenue - (Explicit costs + Implicit costs)Explicit costs = Supplies = $15,000Implicit costs = Interest on savings = $20,000 * 3% = $600Implicit costs = Interest on loan = $20,000 * 2% = $400Implicit costs = Foregone salary = $25,000 + $30,000 = $55,000Economic profit = $50,000 - ($15,000 + $600 + $400 + $55,000) = $4,000Accounting profit = Revenue - Explicit costsAccounting profit = $50,000 - $15,000 = $35,000

​Sebastian Decides to Open a Tree Farm

Sebastian Decides to Open a Tree Farm