Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she withdrew $20,000 from her savings, which earned 5 percent interest. She also turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?
A)$-56,000
B)$-6,000
C)$4,000
D)$19,000

Question

Quizplus · Accepted Answer

Economic profit is accounting profit minus implicit costs. Implicit costs are the opportunity costs of the resources used in production. In this case, the implicit costs are the interest Jacqui could have earned on her savings and the salary she could have earned from a job. The interest Jacqui could have earned on her savings is $20,000 * 0.05 = $1,000. The salary Jacqui could have earned from a job is the highest of the three offers, which is $45,000. Therefore, the implicit costs are $1,000 + $45,000 = $46,000. The economic profit is $50,000 - $46,000 = $4,000.

Jacqui Decides to Open Her Own Business and Earns $50,000