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 should:
A) continue this business because he is earning an economic profit.
B) continue this business because the business earns over three times as much as his job offer.
C) continue this business because his payments to outsiders are less than half of his business's income.
D) go back to the job that was offered to him since his economic profit is less than what he would have made on the other job.

Question

Quizplus · Accepted Answer

John's economic profit is calculated by subtracting both his explicit costs ($65,000) and the opportunity cost of his next best alternative (the $50,000 job he passed up) from his total revenue ($160,000). This leaves him with an economic profit of $45,000 ($160,000 - $65,000 - $50,000), indicating that he is indeed earning an economic profit by choosing to run his business instead of taking the job offer.

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