Philip owns and operates a gas station.Philip works 40 hours a week managing the station but doesn't draw a salary.He could earn $800 a week doing the same work for Terrance.The station owes the bank $100,000 and Philip has invested $100,000 of his own money.If Philip's accounting profits are $1,000 per week while the interest on his bank debt is $300 per week, the business's economic profits are
A)-$100 per week.
B)$200 per week.
C)$0 per week.
D)$700 per week.
E)$1,000 per week.

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Philip's implicit cost is the $800 he could earn elsewhere. His explicit costs include the $300 interest. So, economic profit = $1,000 (accounting profit) - $800 (opportunity cost) - $300 (interest) = -$100.

Philip Owns and Operates a Gas Station