William quits his job where he earns an annual salary of $75,000 and opens a management consulting business,charging an hourly rate of $120.He works out of his home,converting a storeroom into an office.(Zoning restrictions prevent William from renting out the room. )Start-up costs are financed by selling $15,000 worth of bonds he inherited that were earning annual interest payments of $900.During his first year,William incurs expenses for supplies and utilities that total $3,500.If William bills 500 hours of consulting time in the first year,he earns an economic profit equal to

Question

Quizplus · Accepted Answer

William's total revenue in the first year would be:

Total revenue = Billable hours x Hourly rate 
Total revenue = 500 x $120 
Total revenue = $60,000

William's total expenses in the first year would be:

Total expenses = Start-up costs + Supplies + Utilities 
Total expenses = $15,000 + $3,500 + $0 
Total expenses = $18,500

William's economic profit in the first year would be:

Economic profit = Total revenue - Total expenses - Opportunity cost 
Opportunity cost = Interest William would have earned on bonds = $900

Economic profit = $60,000 - $18,500 - $900 
Economic profit = $40,600

Therefore, the best choice is C, with an economic profit of -$19,400.

William Quits His Job Where He Earns an Annual Salary