Suppose an entrepreneur starts a business earning $2M in revenue in 2009 while at the same time incurring $1.8M in costs.If the entrepreneur's best outside alternative employment opportunity is to earn $300K,what are the firms accounting and economic profits?
A)$200K,-$100K
B)$200K,$100K
C)$300K,$100K
D)$300K,-$100K
E)$200K,$200K

Question

Quizplus · Accepted Answer

Accounting profit is calculated as total revenue minus total explicit costs. 
Accounting profit = $2M - $1.8M = $200K

Economic profit takes into account both explicit and implicit costs. Implicit costs include the opportunity cost of the entrepreneur's best outside alternative employment opportunity, which is $300K in this case. 
Economic profit = $2M - $1.8M - $300K = -$100K

Therefore, the correct answer is A, which is accounting profit of $200K and economic profit of -$100K.

Suppose an Entrepreneur Starts a Business Earning $2M in Revenue