Aaron gave up a job as a tire rotator that paid $20,000 a year to start his own T-shirt business. The T-shirt company has the following revenues and costs: TR = $60,000; costof hiring employees = $40,000; cost of materials = $8,000; cost of rent and insurance =$6,000. According to these data, Aaron's business made a(n)
A) economic profit of $6,000
B) normal profit of $6,000
C) economic loss of $6,000
D) economic loss of $14,000
E) normal profit of $14,000

Question

Quizplus · Accepted Answer

Aaron's economic profit is calculated by subtracting all explicit and implicit costs from total revenue (TR). Explicit costs here are the costs of hiring employees ($40,000), materials ($8,000), and rent and insurance ($6,000), totaling $54,000. The implicit cost is the forgone salary of $20,000. So, the total costs are $74,000 ($54,000 + $20,000). Subtracting this from the total revenue ($60,000) results in an economic loss of $14,000.

Aaron Gave Up a Job as a Tire Rotator That