Scenario 14-1
As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.
-Refer to Scenario 14-1.At the end of the first year of operating her new business,Mary's accountant reported an accounting profit of $150,000.What was Mary's economic profit?

Question

Quizplus · Accepted Answer

Economic profit is accounting profit minus implicit costs. Implicit costs are the opportunity costs of the resources used in production. In this case, the implicit costs are the $100,000 that Mary could have earned by investing the $1 million in a risk-free bond fund and the $75,000 that she could have earned by continuing to work at Lucky.Com Inc. Therefore, Mary's economic profit is $150,000 - $100,000 - $75,000 = -$25,000.

Scenario 14-1 As Part of an Estate Settlement Mary Received $1 Million