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 $800 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 $300 per week, the business's economic profits are
A) -$100 per week.
B) $200 per week.
C) $0 per week.
D) $700 per week.
E) $1,000 per week.

Question

Quizplus · Accepted Answer

Economic profit considers both explicit and implicit costs. Philip's implicit cost is the $800 he foregoes by not working for Terrance. The explicit costs include the $300 interest. Therefore, economic profit = accounting profit ($1,000) - implicit cost ($800) - explicit cost ($300) = -$100 per week.

Philip Owns and Operates a Gas Station