Scenario 14-4
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.
-Refer to Scenario 14-4. 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

Quizplus · Accepted Answer

Victor's economic profit is calculated by subtracting both the opportunity cost of the investment ($100,000 from the bond fund) and the opportunity cost of his foregone salary ($75,000) from the accounting profit ($150,000). This results in an economic profit of $150,000 - $100,000 - $75,000 = -$25,000.

Scenario 14-4 Victor Is the Recipient of $1 Million from a Lawsuit