Anna is a tax accountant and she left her job with a large public accounting company to start her own accounting office.In doing this, Anna gave up her salary of $120,000 and took $60,000 out of her savings (which was earning a return of 5 percent) to fund her startup.Her first year, she had $180,000 in revenues and had $40,000 in operating expenses.Anna's tax accounting business earned economic profits of
A)$140,000.
B)$17,000.
C)$20,000.
D)zero.

Question

Quizplus · Accepted Answer

To calculate the economic profit, we subtract all of Anna's explicit costs (salary and operating expenses) and her implicit cost, which is the opportunity cost of her savings earning a return of 5%.

Total Explicit Cost = $120,000 + $40,000 = $160,000 
Total Implicit Cost = $60,000 x 5% = $3,000 
Total Cost = $160,000 + $3,000 = $163,000

Total Revenue = $180,000

Economic Profit = Total Revenue - Total Cost 
Economic Profit = $180,000 - $163,000 
Economic Profit = $17,000

Therefore, the answer is B) $17,000.

Anna Is a Tax Accountant and She Left Her Job