You use $5,000 of your own money to start a dog-walking business. During the first year you earn a 6% return on your 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 profit is $5,000 * 6% = $300. However, the implicit cost, or opportunity cost, of not investing the $5,000 in an alternative with an 8% return is $5,000 * 8% = $400. Therefore, the economic profit is $300 (explicit profit) - $400 (implicit cost) = -$100.

You Use $5,000 of Your Own Money to Start a Dog-Walking