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. Which of the following statements is true?
A)Tom has an opportunity cost of $41,000.
B)Tom earns an accounting profit of $35,000.
C)Tom experiences an economic loss of $6,000.
D)All of these are correct.

Question

Quizplus · Accepted Answer

Tom's opportunity cost includes his forgone salary ($30,000), rental income ($10,000), and interest ($1,000), totaling $41,000. His accounting profit is the difference between his revenue ($50,000) and explicit costs ($15,000), which is $35,000. His economic profit, which considers both explicit and implicit costs (opportunity costs), is $50,000 (revenue) - $15,000 (explicit costs) - $41,000 (opportunity costs) = -$6,000, indicating an economic loss. Therefore, all statements are correct.

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