You use $5,000 of your own money to start a dog-walking business. During the first year you earn a 5% return on your investment. If the current interest rate on savings 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 gain is the 5% return on the $5,000 investment, which is $250. However, by choosing to invest in the business rather than in a savings account with an 8% interest rate, there's an opportunity cost of $400 (8% of $5,000). The economic profit is the actual gain ($250) minus the opportunity cost ($400), resulting in a negative $150.

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