Suppose Winston's annual salary as an accountant is $60,000,and his financial assets generate $4,000 per year in interest.One day,after deciding to be his own boss,he quits his job and uses his financial assets to establish a consulting business,which he runs out of his home.To run the business,he outlays $8,000 in cash to cover all the costs involved with running the business,and earns revenues of $150,000.What costs would be considered when calculating economic profit?

Question

Quizplus · Accepted Answer

Economic profit takes into account both explicit (cash outlays) and implicit costs (opportunity costs). In this case, Winston's opportunity cost is his salary and the interest he would earn if he did not start the business. Therefore, the economic profit would be calculated as revenues ($150,000) minus the explicit cost ($8,000) minus the opportunity cost ($64,000), which equals $78,000. Option A considers both the opportunity cost of his job and the interest forgone, as well as the explicit cost of starting the business.

Suppose Winston's Annual Salary as an Accountant Is $60,000,and His