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. $20,000
B
b. -$39,000
C
c. -$87,000
D
d. $23,000

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. $20,000

B

b. -$39,000

C

c. -$87,000

D

d. $23,000

BlackTom AI · Accepted Answer

Economic profit equals total revenue minus both explicit costs and implicit (opportunity) costs, so we must subtract all cash outlays plus the income forgone by choosing this business.

1) Relevant knowledge points and concepts
- Total revenue = money received from sales.
- Explicit costs = actual cash payments for inputs (wages, ingredients, rent, etc.).
- Implicit costs (opportunity costs) = income the owner forgoes by not working elsewhere or not earning interest on saved funds.
- Economic profit = Total revenue − Explicit costs − Implicit costs.

2) Step-by-step reasoning
- Total revenue: $80,000 from food sales.
- Explicit costs (cash payments this year):
  - Ingredients: $20,000
  - Assistant wage: $25,000
  - Kitchen hire: $12,000
  Sum of explicit costs = $20,000 + $25,000 + $12,000 = $57,000.
- Accounting profit (revenue − explicit costs) = $80,000 − $57,000 = $23,000.
- Implicit costs:
  - Foregone salary from his old job = $60,000 (he quit).
  - Foregone interest on the $50,000 withdrawn (4% per year) = 0.04 × $50,000 = $2,000.
  Total implicit costs = $60,000 + $2,000 = $62,000.

3) All intermediate calculations shown
- Explicit costs = 20,000 + 25,000 + 12,000 = 57,000
- Accounting profit = 80,000 − 57,000 = 23,000
- Forgone interest = 0.04 × 50,000 = 2,000
- Total implicit costs = 60,000 + 2,000 = 62,000
- Economic profit = 23,000 − 62,000 = −39,000

4) Why the correct answer is correct
Subtracting both explicit and implicit costs captures the true economic cost of starting the business. After covering explicit expenses, Alex’s remaining accounting profit ($23,000) is not enough to compensate for the large opportunity costs ($62,000), producing an economic loss of $39,000.

5) Why the other options are incorrect
- a. $20,000: Not supported by any correct combination of costs; confuses figures.
- c. −$87,000: This would result from incorrectly treating the $50,000 withdrawn as a one-time explicit cost (principal) in addition to other costs; the principal is not an economic cost—only forgone interest is.
- d. $23,000: This is accounting profit (revenue − explicit costs) but ignores implicit costs, so it is not the economic profit.