Imagine Tom's annual salary as an assistant store manager is $30,000. He also owns a building that he rents out, earning $10,000 annually, and he has financial assets that generate $1,000 per year in interest. One day, after deciding to be his own boss, he quits his job, evicts his tenants, and uses his financial assets to establish a bicycle repair shop in the building he owns. To run the business, he outlays $15,000 in cash to cover all the costs involved with running the business and earns revenues of $50,000. Has Tom made the best decision?
A)Yes, because his accounting profit is positive.
B)No, because his economic profit is negative.
C)Yes, because his accounting profit is larger than his economic profit.
D)No, because his accounting profit is larger than his economic profit.

Question

Quizplus · Accepted Answer

Economic profit considers both explicit costs (like the $15,000 outlay) and implicit costs (like the forgone salary of $30,000, rental income of $10,000, and interest of $1,000). Tom's accounting profit from the business is $35,000 ($50,000 revenue - $15,000 costs), but when considering the forgone income of $41,000 (salary + rental income + interest), his economic profit is negative, indicating the decision might not be the best financially.

Imagine Tom's Annual Salary as an Assistant Store Manager Is