Dan's Car Wash produces $150,000 in revenues and incurs $120,000 in labor wages, materials, rent, and other explicit costs. Moreover, Dan gave up a $40,000-a-year job as a hotel valet to start his car wash business. Dan's economic profit is _____, and he _____ earning a normal profit.

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenues. Here, explicit costs are $120,000, and the implicit cost (the opportunity cost of Dan's foregone salary) is $40,000. So, the economic profit is $150,000 - $120,000 - $40,000 = -$10,000. Since the economic profit is negative, Dan is not earning a normal profit, which would be indicated by an economic profit of zero.

Dan's Car Wash Produces $150,000 in Revenues and Incurs $120,000