Sam withdrew $100,000 from an interest bearing bank account with an annual yield of 10%. He used the $100,000 to buy real estate, which he sold after one year for $110,000. According to an economist, how much was Robert's economic profit on this deal?

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, the explicit revenue from selling the real estate is $110,000. The explicit cost is the $100,000 used to buy the real estate. However, the implicit cost includes the opportunity cost of not earning the 10% interest on the $100,000 if it had stayed in the bank account, which is $10,000. Therefore, the economic profit is $110,000 (revenue) - $100,000 (explicit cost) - $10,000 (implicit cost) = $0.

Sam Withdrew $100,000 from an Interest Bearing Bank Account with an Annual