Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000. Which of the following statements is correct?
A) Bev's total explicit costs are $25,300.
B) Bev's total implicit costs are $300.
C) Bev's accounting profits exceed her economic profits by $300.
D) Bev's economic profit is $4,700.

Question

Quizplus · Accepted Answer

Bev's explicit costs are the actual out-of-pocket expenses she incurred in starting the business. In this case, it only includes the $25,000 she withdrew from her savings account. Thus, her explicit costs are $25,000.
Her implicit costs are the opportunity costs of the resources she used to start the business. In this case, it includes the $300 she would have earned in interest if she hadn't withdrawn the money from her savings account. Thus, her implicit costs are $300.
Her accounting profit is calculated by subtracting her total explicit costs from her revenues. Thus, her accounting profit is $30,000 - $25,000 = $5,000.
Her economic profit is calculated by subtracting both her explicit and implicit costs from her revenues. Thus, her economic profit is $30,000 - $25,000 - $300 = $4,700. Therefore, option D is correct.

Bev Is Opening Her Own Court-Reporting Business