Imagine Tom's annual salary as an assistant store manager is $30,000,he owns a building that rents for $10,000 yearly,and his financial assets generate $1,000 per year in interest.One day,after deciding to be his own boss,he quits his job,evicts his tenants,and uses his financial assets to establish a bicycle repair shop.To run the business,he outlays $15,000 in cash to cover all the costs involved with running the business,and earns revenues of $50,000.Has Tom made the best decision?

Question

Quizplus · Accepted Answer

Tom's accounting profit is his total revenue minus his explicit costs, which is $50,000 - $15,000 = $35,000. However, to determine his economic profit, we need to consider his implicit costs as well. Implicit costs are the opportunity costs of his resources, i.e. the income he gave up by quitting his job, evicting his tenants, and using his financial assets. His implicit costs are therefore $30,000 (salary) + $10,000 (rent) + $1,000 (interest) = $41,000. Therefore, his economic profit is $35,000 - $41,000 = -$6,000, which means he is not earning enough to compensate for the opportunity cost of his resources. Therefore, the best answer is B.

Imagine Tom's Annual Salary as an Assistant Store Manager Is