Asked by Alanis Matthews on Jul 02, 2024
Verified
Scott used $4,000,000 from his savings account that paid an annual interest of 5% and a $60,000 loan at an annual interest rate of 5% to purchase a hardware store.After one year,Scott sold the business for $4,100,000. His economic profits is:
A) $300,000
B) $100,000
C) $97000
D) None.He runs an economic loss of $103,000
Economic Profits
The surplus left after deducting both explicit and implicit costs from total revenues.
Savings Account
A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.
Interest Rate
The cost of borrowing money or the return on investment expressed as a percentage, typically on an annual basis.
- Develop an understanding of the framework of economic profits, with a focus on the roles of implicit and explicit costs.
- Recognize the role of opportunity costs in calculating economic profits.
Verified Answer
AG
adriana garcia7 days ago
Final Answer :
D
Explanation :
Scott's total investment includes his savings and the loan, totaling $4,060,000. The interest on his savings and loan for one year at 5% is $203,000 ($4,060,000 * 0.05). Selling the business for $4,100,000, he makes a gross profit of $40,000 ($4,100,000 - $4,060,000). Subtracting the interest expense of $203,000 from the gross profit results in an economic loss of $163,000, not $103,000 as stated. However, since none of the provided choices accurately reflect the correct calculation, the closest applicable choice based on the provided options is D, acknowledging an economic loss, albeit with an incorrect amount.
Learning Objectives
- Develop an understanding of the framework of economic profits, with a focus on the roles of implicit and explicit costs.
- Recognize the role of opportunity costs in calculating economic profits.