Helga owns Viking, Inc., started with her $100,000 inheritance.Helga's accountant informs her that her firm earned a profit of $100,000 last year, and that if she chooses to invest the money she can expect a 10 percent return.If Helga did not run Viking, she would not work.What were Helga's economic profits last year?

Question

Quizplus · Accepted Answer

Economic profit is the difference between total revenue and total opportunity cost (including explicit and implicit costs). Helga's total revenue is $100,000 (profit earned by Viking, Inc.), her explicit cost is $0 (since she started the firm with her inheritance money and did not invest any additional money), and her implicit cost is the opportunity cost of not working somewhere else. Since Helga would not work if she did not run Viking, the opportunity cost of not working is $0. Therefore, her economic profit is $100,000 - $0 - $10,000 (10% return on investment) = $90,000.

Helga Owns Viking, Inc