Richard Bland quit his job as an accounting professor to start his own restaurant.He gave up a salary of $50,000 per year and withdrew $100,000 in bank CDs earning 5 percent to buy a building and equipment.In the restaurant's first year it had direct expenses of $75,000 and revenues of $150,000.The restaurant's economic profit was

Question

Quizplus · Accepted Answer

To calculate the economic profit, we need to use the formula: 
Economic profit = total revenue - total economic costs 
Total economic costs = direct costs + opportunity costs 
Direct costs = $75,000 
Opportunity costs = salary Richard Bland gave up + interest income he could have earned from bank CDs 
Salary Richard Bland gave up = $50,000 
Interest income he could have earned from bank CDs = $100,000 x 5% = $5,000 
Opportunity costs = $50,000 + $5,000 = $55,000 
Total economic costs = $75,000 + $55,000 = $130,000 
Total revenue = $150,000 
Economic profit = $150,000 - $130,000 = $20,000 
Therefore, the economic profit of Richard Bland's restaurant in the first year was $20,000.

Richard Bland Quit His Job as an Accounting Professor to Start