Neville is a lawyer at a large law firm where he earns a salary of $170,000 per year. He is thinking of leaving the firm to set up his own law office. To do this, he would need to invest $140,000 of his savings, which currently earns 5% in interest each year. He estimates that if he starts a law office, his annual revenue will be $510,000, and his explicit financial costs will be $300,000. How much would Neville earn in economic profits or losses if he starts his own law office?

Question

Quizplus · Accepted Answer

Neville's economic profit calculation includes his explicit costs, opportunity costs, and revenue. Explicit costs are $300,000. Opportunity costs include his current salary ($170,000) and the interest he would forgo on his savings ($140,000 * 5% = $7,000), totaling $177,000. His revenue from the law office would be $510,000. Subtracting both explicit and opportunity costs from his revenue ($510,000 - $300,000 - $177,000) gives an economic profit of $33,000.

Neville Is a Lawyer at a Large Law Firm Where