Suppose Ernie gives up his job as a financial advisor to P.E.T.S.,where he earned $30,000 per year,to open up a store selling pet-care products.He invested $10,000 in the store,which was originally savings that earned 5 percent interest.This year,the revenue from the new business was $50,000 and the explicit costs were $10,000.The economic profit earned by Ernie was _____

Question

Quizplus · Accepted Answer

Economic profit is calculated as total revenue minus total costs, including both explicit and implicit costs. Ernie's implicit costs include the $30,000 salary he gave up and the $500 interest he would have earned on his savings. Therefore, his total costs are $10,000 (explicit) + $30,000 (salary) + $500 (interest) = $40,500. His economic profit is $50,000 (revenue) - $40,500 (total costs) = $9,500.

Suppose Ernie Gives Up His Job as a Financial Advisor