Question

Lydia is trained as a statistician. She has a job offer with a business consulting company where she will earn $100,000 a year. However, she wants to start her own business consulting firm. She expects the firm to generate annual revenues of $300,000. Her expenses from the consultancy is given in the table below. What is her economic profit? Expense Item Annual Cost in dollars Rent for office space $60,000 Compensation for Hired Employees $40,000 Software Applications $20,000 o А $120,000 o B $200,000 C $80,000 o D $180,000

Answer 1

Correct Answer is :- (C) $80000

Explanation:- Economic profit is the profit which includes the Implicit as well explicit cost plus opportunity cost foregone.

=> Here, Lydia has opportunity to doing job and earn $100000 but she rejected it, so the opportunity cost foregone is $100000.

Economic profit = Total revenue - Total cost - opportunity cost foregone.

​ =$300000-($60000+$40000+$20000)-$100000

= $300000- $120000-$100000

= $80000