Suppose Ernie gives up his job as a financial advisor for pets, for which he earned $30,000 per year, to open up a store selling spot remover to Dalmatians. He invested $10,000 of his savings, which had been earning 5 percent interest. This year's revenues in the new business were $50,000 and explicit costs were $10,000. Calculate Ernie's economic profit.
A) $10,000
B) $50,000
C) $20,000
D) $40,000
E) $9,500

Question

Quizplus · Accepted Answer

Ernie's economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Explicit costs are $10,000. Implicit costs include his forgone salary of $30,000 and the forgone interest on his savings ($10,000 * 5% = $500). Therefore, implicit costs total $30,500. Subtracting both explicit ($10,000) and implicit costs ($30,500) from the total revenue ($50,000) gives an economic profit of $9,500.

Suppose Ernie Gives Up His Job as a Financial Advisor