Corinne is offered a job with a salary of $70,000, which she turns down to start her own business. She uses $20,000 of her own savings to help start the business, savings that had been providing her a return of $1,000 per year. Over her first year in business, Corinne collects total revenue of $180,000 and must cover explicit costs of $105,000. During her first year in business, Corinne's accounting profit is _____, and her economic profit is _____.
A)$110,000; $4,000
B)$75,000; $4,000
C)$75,000; -$16,000
D)$110,000; -$16,000

Question

Quizplus · Accepted Answer

Corinne's accounting profit is her total revenue minus her explicit costs, which is: 
$180,000 - $105,000 = $75,000

To calculate Corinne's economic profit, we need to take into account her implicit costs. We know that Corinne turned down a job with a salary of $70,000 to start her own business. This means that her implicit costs are $70,000, which is the salary she could have earned if she had taken the job offer. Additionally, she gave up $1,000 in interest earnings from her savings to invest in her business, which is another implicit cost.

Therefore, Corinne's economic profit is:
Accounting profit - implicit costs = $75,000 - $71,000 = $4,000

So, the best choice is B.

Corinne Is Offered a Job with a Salary of $70,000