Philip owns and operates a gas station. Philip works 40 hours a week managing the station but doesn't draw a salary. He could earn $700 a week doing the same work for Terrance. The station owes the bank $100,000 and Philip has invested $100,000 of his own money. If Philip's accounting profits are $1,000 per week while the interest on his bank debt is $400 per week, the business's economic profits are
A) $0 per week.
B) -$100 per week.
C) $600 per week.
D) $300 per week.
E) $1,000 per week.

Question

Quizplus · Accepted Answer

Economic profit accounts for opportunity costs. Philip's opportunity cost of not working for Terrance is $700 per week. Accounting profit is $1,000, but subtracting the opportunity cost ($700) and the interest on the bank debt ($400) results in an economic profit of -$100 per week.

Philip Owns and Operates a Gas Station