You use $45,000 of your own money to start an espresso stand. During the first year you earn a 10% return on that investment. If the current interest rate is 8%, you earn an economic profit of

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, the explicit cost is $0 since the question doesn't mention any. The implicit cost is the opportunity cost of not investing the $45,000 at the current interest rate of 8%, which would be $45,000 * 0.08 = $3,600. The actual return on the investment is 10% of $45,000, which is $45,000 * 0.10 = $4,500. Therefore, the economic profit is $4,500 (actual return) - $3,600 (opportunity cost) = $900.

You Use $45,000 of Your Own Money to Start an Espresso