Tomas quit his job at the Tri-City bank where he earned $50,000 a year to start his own businesses, a bank marketing company. He estimates his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. He used $100,000 in savings
that earned 5 percent interest annually to finance the new business. In the first year, the firm earned revenue of $250,000. The costs for rent, supplies, and an employee’s salary were $200,000. What was the accounting profit for the new business? What was the economic profit (or loss)? Explain your calculations for both questions.
Please provide the best answer for the statement.
Total revenue was $250,000 and explicit costs (rent, supplies, and employee salaries and benefits) were $200,000, so accounting profit was $50,000. The implicit costs were $60,000 ($5,000 in forgone interest on the $100,000 plus forgone salary of $50,000 plus forgone entrepreneurial income of $5,000). The firm had an economic loss of $10,000 ($250,000 minus $260,000).
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