Suppose that you could earn $100 in accounting profit from selling hot chocolate. Alternatively, you could earn $80 accounting profit from selling donuts. Calculate the economic profit of selling hot chocolate.

Question

BlackTom AI · Accepted Answer

First, restating the scenario: you have two choices, earning accounting profit of 100 from hot chocolate or 80 from donuts, and you must consider opportunity cost to determine economic profit for hot chocolate.
Option 1: '$180' - This would imply summing profits or adding something beyond the given data. Economic profit uses opportunity cost subtracted from accounting profit, not a sum with alternative profits, so $180 is not consistent with the definition.
Option 2: '$80' - This value might reflect the accounting profit from donuts, or perhaps the opportunity cost alone, but economic profit is not simply the lower of the two figures or the other option’s profit. It should be the net of 100 minus the foregone alternative, not just $80.
Option 3: '$100' - This is the accounting profit from hot chocolate, but economic profit adjusts for what you sacrificed by not choosing the alternative. Therefore, using only accounting profit ignores the opportunity cost and is not the economic profit.
Option 4: '$20' - This aligns with the standard economic profit formula: economic profit = accounting profit − opportunity cost. The opportunity cost here is the next best alternative foregone, which is the $80 accounting profit from donuts. Subtracting 80 from 100 yields 20. Hence this value reflects the true economic profit for selling hot chocolate.
In summary, economic profit requires subtracting the next best alternative’s accounting profit from the chosen option’s accounting profit, not simply reporting the accounting profit or incorrectly summing profits. The only value that corresponds to 100 minus 80 is $20, making this the economically accurate result given the choices.

Suppose that you could earn $100 in accounting profit from selling hot chocolate. Alternatively, you could earn $80 accounting profit from selling donuts. Calculate the economic profit of selling hot chocolate.Single choice

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