Last year Reed's Financial Services received revenues of $500,000. Labor costs were $150,000, and equipment and building rental was $100,000. The owner Reed could be making $200,000 as a software engineer if he didn't operate the financial services firm. What is Reed's economic profit?

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, explicit costs are labor ($150,000) and rental ($100,000), totaling $250,000. The implicit cost is the opportunity cost of Reed not working as a software engineer, which is $200,000. Subtracting both explicit ($250,000) and implicit ($200,000) costs from the total revenue ($500,000) gives an economic profit of $50,000.

Last Year Reed's Financial Services Received Revenues of $500,000