Alex has been working as a chef in a large restaurant for many years. He has been earning a salary of $60,000 per year. He has always dreamt of starting a catering business. One day, he decides to do it. He quits his job. He needs money to pay costs for the business, so he withdraws $50,000 from his bank savings account, which had been earning 4% interest revenue. He hires an assistant and a kitchen; and buys some ingredients for cooking ($20,000). In the first year, he sells $80,000 worth of food; pays his assistant $25,000; and pays $12,000 for the hire of the kitchen. What is his economic profit for the year?单项选择题
A
a. -$39,000
B
b. $20,000
C
c. $23,000
D
d. -$87,000

Question

Alex has been working as a chef in a large restaurant for many years. He has been earning a salary of $60,000 per year. He has always dreamt of starting a catering business. One day, he decides to do it. He quits his job. He needs money to pay costs for the business, so he withdraws $50,000 from his bank savings account, which had been earning 4% interest revenue. He hires an assistant and a kitchen; and buys some ingredients for cooking ($20,000). In the first year, he sells $80,000 worth of food; pays his assistant $25,000; and pays $12,000 for the hire of the kitchen. What is his economic profit for the year?单项选择题

A

a. -$39,000

B

b. $20,000

C

c. $23,000

D

d. -$87,000

BlackTom AI · Accepted Answer

Economic profit equals total revenue minus both explicit costs (actual out-of-pocket payments) and implicit costs (opportunity costs of resources owned by the entrepreneur).

1. Relevant knowledge points and concepts
- Explicit costs: wages paid to others, rent, materials — actual monetary payments.
- Implicit costs: forgone salary from quitting the job and forgone interest on savings used to finance the business.
- Accounting profit ignores implicit costs; economic profit includes them.

2. Step-by-step reasoning
- Total revenue in year 1 = $80,000.
- Explicit costs: assistant $25,000 + kitchen hire $12,000 + ingredients $20,000.
  - Sum of explicit costs = 25,000 + 12,000 + 20,000 = $57,000.
- Implicit costs:
  - Forgone salary (opportunity cost of Alex’s labor) = $60,000.
  - Forgone interest on withdrawn savings = 4% of $50,000 = 0.04 × 50,000 = $2,000.
  - Sum of implicit costs = 60,000 + 2,000 = $62,000.

3. Calculations (all intermediate steps)
- Explicit costs = $57,000.
- Implicit costs = $62,000.
- Total economic costs = 57,000 + 62,000 = $119,000.
- Economic profit = Revenue − Total economic costs = 80,000 − 119,000 = −$39,000.

4. Why the correct answer is correct
Including both the explicit payments and the full opportunity costs (foregone salary and forgone interest) gives an economic loss of $39,000. The $50,000 withdrawal itself is not an expense — only the interest it would have earned ($2,000) is an opportunity cost.

5. Why the other options are incorrect
- b. $20,000: does not match any correct calculation; likely a mistaken subtraction.
- c. $23,000: equals accounting profit (80,000 − 57,000) but ignores implicit costs, so it is not the economic profit.
- d. −$87,000: would result from incorrectly treating the entire $50,000 withdrawal as an expense in addition to other costs; that double-counts the principal.