An economist left her teaching position that paid $80,000 yearly to work full time in her own consulting firm. The firm had a total revenue of $150,000 in the first year and her business expenditure was $70,000. What is the amount of economic profit made by the economist?

Rationale

$0

To calculate the economic profit, we subtract both explicit and implicit costs from total revenue. In this case, the economist's total revenue is $150,000, her business expenditure is $70,000, and she forgoes an $80,000 salary from her teaching job. Therefore, her total costs amount to $150,000, leading to an economic profit of $0.

A (-$3,000) YOUR ANSWER

This choice suggests that the economist incurred a loss of $3,000. However, the calculation shows that her total costs equal her total revenue, resulting in no economic loss or profit. Therefore, this option misrepresents the financial outcome of the business.

B ($5,000) YOUR ANSWER

Claiming an economic profit of $5,000 implies that the economist's revenue exceeded her total costs by that amount. However, this calculation fails to account for the opportunity cost of her forgone salary, which, when considered, results in a break-even scenario rather than a profit.

C ($0) CORRECT

This option correctly identifies that the economist’s total revenue of $150,000 matches her total costs of $150,000, including both her business expenses and the opportunity cost of her previous salary. This results in zero economic profit, indicating that she neither gained nor lost financially from this decision.

D (-$2,000) YOUR ANSWER

An economic loss of $2,000 suggests that the economist's revenue was insufficient to cover her total costs. However, since her total revenue and total costs are equal, this option inaccurately reflects her financial situation, leading to a misunderstanding of her economic profit.

Conclusion

Economic profit measures the difference between total revenue and total costs, including both explicit costs and opportunity costs. In this scenario, the economist's total revenue of $150,000 offsets her total costs of $150,000, resulting in an economic profit of $0. This outcome illustrates the critical concept that opportunity costs must be factored into economic decision-making, particularly when evaluating the viability of leaving a stable job for entrepreneurship.

An economist left her teaching position that paid $80,000 yearly to work full time in her own consulting firm. The firm had a total revenue of $150,000 in the first year and her business expenditure was $70,000. What is the amount of economic profit made by the economist?

$0

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