The sole proprietor of the Milwaukee Machine Company receives all accounting profits earned by her firm. She has a standing salary offer of $35,000 a year to work for a large corporation. If she had invested her capital outside her own company, she estimates that would have returned $22,000 this year. If accounting profits for the year were $50,000, then her economic profits were (based solely on the given figures)

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Quizplus · Accepted Answer

Economic profits are calculated by subtracting both the opportunity costs of capital and the opportunity costs of labor (the salary she could have earned elsewhere) from the accounting profits. Here, the opportunity cost of labor is $35,000 and the opportunity cost of capital is $22,000. Subtracting these from the accounting profits of $50,000 gives $50,000 - $35,000 - $22,000 = -$7,000.

The Sole Proprietor of the Milwaukee Machine Company Receives All