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.How large would Mary's accounting profits need to be to allow her to attain zero economic profit?

Question

Quizplus · Accepted Answer

Mary's accounting profits would need to be $175,000 to allow her to attain zero economic profit. This is because she would need to earn enough to cover her explicit costs (the $100,000 she could have earned in the bond fund) and her implicit costs (the $75,000 she gave up by quitting her job).

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