Scenario 14-4
As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. Her business operates in a perfectly competitive industry. If Mary would have invested the $1 million in a risk-free bond fund she could have earned $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business. Her salary at Lucky.Com Inc. was $75,000 per year.
-Refer to Scenario 14-4.At the end of the first year of operating her new business,Mary's accountant reported an accounting profit of $150,000.What was Mary's economic profit?

Question

Quizplus · Accepted Answer

Mary's economic profit is calculated by subtracting both the opportunity cost of her investment ($100,000) and her foregone salary ($75,000) from her accounting profit ($150,000). This results in an economic profit of $150,000 - $100,000 - $75,000 = -$25,000.

Scenario 14-4 As Part of an Estate Settlement Mary Received $1 Million