Suppose that you open your own business and earn an accounting profit of $40,000 per year. When you started your business, you left a job that paid you a $25,000 salary annually. Also, suppose that you invested $70,000 of your own funds to start up your business. If the normal rate of return on capital is 5 percent, your economic profit is

Question

Quizplus · Accepted Answer

To calculate economic profit, we need to consider the opportunity cost of investing our own funds instead of earning a normal rate of return on them. 
Opportunity cost of investing own funds = $70,000 x 5% = $3,500 
Economic profit = Accounting profit - Opportunity cost 
= $40,000 - ($25,000 + $3,500) 
= $11,500

Suppose That You Open Your Own Business and Earn an Accounting