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16 August, 20:47

Suppose an assistant professor of economics is earning a salary of $75,000 per year. One day she quits her job, sells $100,000 worth of bonds that had been earning 5 percent per year, and uses the funds to open a bookstore. At the end of the year, she shows an accounting profit of $90,000 on her income tax return. What is her economic profit?

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  1. 17 August, 00:35
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    Economic profit $10,000

    Explanation:

    Income earned as an assistant professor = Salary + Interest on bonds = 75000 + 5% on 100,000 = 75000 + 5000

    Income earned as an assistant professor = $80,000

    Income from the bookstrore = $90,000

    In calculating economic profit, opportunity costs are deducted from revenues earned.

    Economic profit = $90,000 - $80,000 = $10,000
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