Question

An economist resigns her $100,000/year university teaching position to work full-time in her own consulting business. In the first year she had total revenue of $250, 000 and expenses of $100,000. Which of the following statements is correct? I. Her accounting profit was $250,000. II. Her accounting profit was $150,000. III. Her economic profit was $50,000. IV. Her economic profit was $150,000 All four statements are true. Only statements II and III are true. Only statement II is true. Only statement III is true. Only statement I is true.

Answer 1

Only statements II and III are true

Step-by-step explanation:

Accounting profit is total revenue less total cost.

Accounting profit = Revenue - Cost

Economic profit is accounting profit less implicit cost or opportunity cost.

Opportunity cost is the cost of the next best option forgone when one alternative is chosen over other alternatives.

Economic profit = Accounting profit - Opportunity cost

Accounting profit = $250, 000 - $100,000 = $150,000

Economic profit = $150,000 -$100,000 = $50,000

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