Lee had invested $100 000 in a risk-free unit trust, on which she earned $10 000 each year. She used that money to buy a prawn farm. She also quit her job as a salesperson to devote all of her time to her prawn business. Her salary as a salesperson was $25 000 per year.
-According to the information provided, at the end of the first year of operating her new business, Lee's accountant reported an accounting profit of $50 000. What was Lee's economic profit?

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Lee's implicit costs include the $10,000 she could have earned from the unit trust and the $25,000 salary she gave up. Therefore, her economic profit is $50,000 (accounting profit) - $10,000 (foregone investment income) - $25,000 (foregone salary) = $15,000.

Lee Had Invested $100 000 in a Risk-Free Unit Trust