Robert left a law firm to begin his own catering business.Robert's salary at the law firm was $100,000.He put $40,000 of his own funds into the business to purchase cooking equipment.His funds were previously earning 10 percent per year.The cost of operating the business including food and supplies was $60,000.Robert's catering firm earned $170,000 in revenues for the first year.Robert's brother insists that he should go back to the law firm, since he was making $100,000 there.Robert says his brother is wrong.Robert is right because
A)he is making $6,000 in economic profits.
B)he is making $110,000 in accounting profits.
C)he is making $106,000 in economic profits.
D)he likes cooking.

Question

Quizplus · Accepted Answer

Robert's economic profit is calculated by subtracting both explicit and implicit costs from total revenue. His explicit costs are $60,000, and his implicit costs include the $100,000 salary he gave up and the $4,000 interest he could have earned on his $40,000 investment. Thus, his total costs are $164,000 ($60,000 + $100,000 + $4,000). With revenues of $170,000, his economic profit is $6,000 ($170,000 - $164,000).

Robert Left a Law Firm to Begin His Own Catering