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.What are Tom's economic profits?

Question

Quizplus · Accepted Answer

Tom's economic profits are calculated by subtracting both explicit and implicit costs from his revenues. His explicit costs are $15,000. His implicit costs include his forgone salary ($30,000), forgone rental income ($10,000), and forgone interest income ($1,000). Total costs are $56,000 ($15,000 + $30,000 + $10,000 + $1,000). His revenues are $50,000. Thus, economic profit is $50,000 - $56,000 = -$6,000.

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