Question

A small business owner earns $100,000 in revenue annually. The explicit costs equal $75,000. The owner could work for someone else and earn $35,000 annually. The owner's accounting profit is and the economic profit is O -$10,000; $25,000 O $10,000; -$25,000 O $25,000; $0 O $25,000:-$10,000

Answer 1

Option D is correct: $25,000; -$10,000

Explicit cost is the direct cost that is incurred by any business in the form of the payments to the factors of production like wages to the labor, rent of the building where the business is happening, interest etc. Here explicit cost is given as $75,000.

On the other hand, implicit cost is the opportunity cost of doing the business. Opportunity cost is the cost of giving something up for getting something else in return. Implicit cost here will be $35,000 which the owner would have got if he worked for someone else and thus this is foregone income.

Accounting profit is the profit that the business gets when it subtracts its explicit cost from its total revenue.

Accounting profit = Total revenue - Explicit cost

= 100,000 - 75,000

= $25,000

Economic profit is the profit that the business gets when it subtracts its explicit and implicit cost from its total revenue.

Economic profit = Total revenue - (Explicit cost + Implicit cost)

= 100,000 - (75,000 + 35,000)

= - $10,000