Suppose that you open your own business and earn an accounting profit of $35,000 per year. When you started your business, you left a job that paid you a $30,000 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 10 percent, your economic profit is

Question

Quizplus · Accepted Answer

The economic profit is calculated as accounting profit minus the opportunity cost of the resources used. In this case:

Accounting profit = $35,000 
Opportunity cost = $30,000 salary you gave up 
Normal rate of return on capital = 10%

The opportunity cost of your time and resources is $30,000, and the normal rate of return on your investment is 10% of $70,000, which is $7,000.

So, your economic profit is:

Accounting profit - (Opportunity cost + Normal rate of return)

$35,000 - ($30,000 + $7,000) = -$2,000

Therefore, the answer is D: -$2,000.

Suppose That You Open Your Own Business and Earn an Accounting