Asked by Andrea Hogbin on Sep 23, 2024
Verified
James used $200,000 from his savings account that paid an annual interest of 10% to purchase a hardware store.After one year,James sold the business for 300,000. His economic profit is:
A) $300,000
B) $100,000
C) $80,000
D) $20,000
Economic Profit
A measure of profit that includes recognition of implicit costs (like the cost of equity capital). Economic profit measures the true profitability of decisions.
Savings Account
A deposit account held at a bank or financial institution that pays interest but typically has limited withdrawal options.
Annual Interest
The amount of interest due per year as a percentage of the amount lent, deposited, or borrowed.
- Evaluate economic benefits, including calculations for opportunity costs and explicit charges.
Verified Answer
GN
Gurleen Nagra5 days ago
Final Answer :
C
Explanation :
James's economic profit is calculated by subtracting both the explicit and implicit costs from the total revenue. The explicit gain from selling the business is $300,000 - $200,000 = $100,000. However, the implicit cost, or the opportunity cost of not earning interest in the savings account, is $200,000 * 10% = $20,000. Therefore, the economic profit is $100,000 (explicit gain) - $20,000 (implicit cost) = $80,000.
Learning Objectives
- Evaluate economic benefits, including calculations for opportunity costs and explicit charges.