Harvey quit his job at State University, where he earned $62,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $4,000 a year. To start the business, he cashed in $50,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 10,000 units of software at $72 for each unit. Of the $72 per unit, $60 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.The economic profits of Harvey's firm in the first year were

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, total revenue is 10,000 units * $72/unit = $720,000. Explicit costs include the costs of production, packaging, marketing, employee wages and benefits, and rent, which total to 10,000 units * $60/unit = $600,000. Implicit costs include the forgone salary of $62,000 and the forgone interest on the bonds ($50,000 * 10% = $5,000), plus the forgone entrepreneurial income of $4,000, totaling $71,000. Subtracting both explicit ($600,000) and implicit costs ($71,000) from the total revenue ($720,000) gives an economic profit of $720,000 - $600,000 - $71,000 = $49,000.

Harvey Quit His Job at State University, Where He Earned