You borrow $40,000 at an interest rate of 5% to open Organic Foods, an all-natural food store. You will earn an economic profit if the return on your investment is
A) greater than 5%.
B) 5%.
C) between 0 and 5%.
D) 10% or greater.

Question

Quizplus · Accepted Answer

Economic profit occurs when the return on investment exceeds all costs, including the opportunity cost of capital. Here, the opportunity cost is the 5% interest rate. Therefore, earning more than 5% would result in an economic profit.

You Borrow $40,000 at an Interest Rate of 5% to Open