John is thinking of opening a florist shop. He forecasts revenues of $200,000 per year and explicit financial costs of $140,000 per year. He can pursue this opportunity only if he quits his current job as a driver, where he earns $45,000 per year. He would also need to invest $110,000 of his savings to set up the shop-funds on which he would otherwise be earning a 6% return. Based on this information, how much economic profit or loss would John earn in his first year in business?
A)a loss of $50,000
B)a loss of $5,400
C)a profit of $8,400
D)a profit of $60,000

Question

Quizplus · Accepted Answer

Economic profit = Revenues - Explicit costs - Implicit costs= $200,000 - $140,000 - ($45,000 + $110,000 * 0.06)= $200,000 - $140,000 - $51,000= $8,400

John Is Thinking of Opening a Florist Shop