Scenario 9.1
Jane left her job at Siemens and started her own boutique. She used to earn $50,000 annually at Siemens. She took a loan of $10,000 and used $20,000 from her personal savings to begin her venture. She agreed to repay the loan with 10% interest. Her business is bringing in $80,000 annually. She has rent and labor expenses of $15,000. Also assume that Jane could have used her own money i.e. $20,000 to buy stocks in Intel which would have returned 5% to her last year.
-Nancy owns and operates a drug store that generates total revenues worth $30 million in a particular year. Her accounting costs for the year are $25 million. She could have earned $3 million in this year, if she had worked as a consultant for a pharmaceutical firm. Further, she could have earned 5 percent interest on $40 million of her own money that she invests in the business this year. Nancy's accounting profit in this year is _____ and her economic profit is _____.
A)$5 million; zero
B)$5 million; $3 million
C)$5 million; $8 million
D)zero; $3 million
E)$3 million; $43 million

Question

Quizplus · Accepted Answer

Jane's accounting profit is her total revenue minus her explicit costs (rent, labor, interest on the loan). Her economic profit also considers opportunity costs (her salary at Siemens, potential earnings from Intel stocks). Nancy's accounting profit is her total revenue minus her accounting costs ($30 million - $25 million = $5 million). Her economic profit subtracts both her accounting costs and her opportunity costs (salary she could have earned and interest from investing her money elsewhere), which results in zero because her opportunity costs ($3 million + $2 million from the $40 million at 5% interest) equal her accounting profit.

Scenario 9.1 Jane Left Her Job at Siemens and Started Her Own