(Scenario: Accounting and Economic Profit) Use Scenario: Accounting and Economic Profit.
Scenario: Accounting and Economic Profit
Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. The economic profit of Casey's Coffee Crush is:
A)$67,000.
B)$0.
C)-$20,000.
D)-$35,000.

Question

Quizplus · Accepted Answer

The economic profit is calculated by deducting all the explicit and implicit costs from the revenue. In this scenario, Casey's revenue was $150,000, but she had to incur explicit costs such as rent ($20,000), equipment ($60,000), and staff and advertising costs ($40,000) which totaled $120,000. Therefore, her accounting profit would be $30,000 ($150,000 - $120,000). However, in order to calculate the economic profit, we need to include the implicit cost of her opportunity cost, which is the salary she gave up by quitting her job at the United Nations. Her opportunity cost would be $60,000, as that is the amount she would have earned if she had continued her job as a translator. Therefore, her economic profit would be -$30,000 ($30,000 - $60,000), which means that she actually incurred a loss by starting the café. Thus, the correct option is D, "-$35,000."