John passes up an offer for a job paying $50,000 a year and, instead, starts his own business. His new business brings in $160,000 in sales during the first year, and his total costs for items such as materials, labor, equipment, shipping, and insurance come to $65,000.
-John's "accounting" profit and economic profit during the first year are, respectively:

Question

Quizplus · Accepted Answer

John's accounting profit is calculated by subtracting his total costs from his sales, which is $160,000 - $65,000 = $95,000. His economic profit subtracts both the explicit costs ($65,000) and the opportunity cost of the job he gave up ($50,000) from his sales, resulting in $160,000 - $65,000 - $50,000 = $45,000.

John Passes Up an Offer for a Job Paying $50,000