Jacqui decides to open her own business and earns $90,000 in accounting profit the first year. When deciding to open her own business, she withdrew $20,000 from her savings, which earned 3 percent interest. She also turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Jacqui's explicit costs include the forgone interest on her savings ($20,000 * 0.03 = $600). Her implicit costs are the forgone salaries from the job offers she turned down ($30,000 + $40,000 + $45,000 = $115,000). Therefore, her total costs are $115,600 ($115,000 + $600). Subtracting this from her accounting profit ($90,000 - $115,600) gives an economic profit of -$25,600. However, none of the options match this calculation, suggesting a mistake in my initial explanation. Re-evaluating the calculation correctly: Jacqui's accounting profit is $90,000. The interest she forgoes by not keeping her $20,000 in savings is $600 (3% of $20,000). The highest paying job she turned down was for $45,000 (since we consider opportunity cost based on the highest foregone alternative). Adding these costs to find her total opportunity costs gives us $45,600. Subtracting this from her accounting profit ($90,000 - $45,600) gives an economic profit of $44,400.

Jacqui Decides to Open Her Own Business and Earns $90,000