Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30, 000 per year, to open up a store selling spot remover to Dalmatians.He invested $10, 000 in the store, which had been in savings earning 5 percent interest.This year's revenues in the new business were $50, 000, and explicit costs were $10, 000.Calculate Ernie's economic profit.

Question

Quizplus · Accepted Answer

Ernie's economic profit is calculated as total revenue minus both explicit and implicit costs. The explicit costs are $10,000. The implicit costs include the forgone salary of $30,000 and the forgone interest of $500 (5% of $10,000). Thus, economic profit = $50,000 - ($10,000 + $30,000 + $500) = $9,500.

Suppose Ernie Gives Up His Job as Financial Advisor for P.E.T.S