Amber owns a small pizza restaurant, where she works full-time in the kitchen. Last year, her accounting profit was $9000. When she decided to run her small pizza restaurant last year, she quit her job and withdrew $60,000 from her bank savings account, earning 6% interest revenue. Referring to the scenario described, what is the economic profit for Amber’s pizza restaurant?

Question

BlackTom AI · Accepted Answer

Here is how to approach the problem step by step, considering opportunity costs in economic profit.

Option a. $5,400
First, identify the economic profit concept: it equals accounting profit minus all opportunity costs of the resources used. Amber earned accounting profit of $9,000 from the restaurant. The scenario mentions she withdrew $60,000 from savings, which implies an opportunity cost: the interest she could have earned if that money stayed in the bank. At 6% interest, the foregone interest is 0.06 × $60,000 = $3,600. There is no information given about a salary foregone from quitting a job, so we assume the primary explicit opportunity cost here is the foregone interest on the withdrawn savings. Therefore economic profit = $9,000 − $3,600 = $5,400. This matches option a.

Option b. −$54,600
This value would imply subtracting the entire $60,000 plus the $9,000, or otherwise double-counting costs. It does not align with standard opportunity-cost accounting, which separately accounts for foregone earnings like the interest on the withdrawn savings. Hence this is incorrect.

Option c. $4,000
This would correspond to subtracting only $5,000 of opportunity cost, which is inconsistent with the given 6% rate on $60,000. If the opportunity cost were $5,000, the interest rate would need to be 8.33% or the principal different; the problem states 6% on $60,000, so $3,600 is the correct foregone cost, not $5,000.

Option d. $7,200
This would arise if you subtracted a larger amount as the opportunity cost, specifically $1,800 more than the correct $3,600, or possibly added $9,000 to some cost. However, the only stated explicit opportunity cost is the foregone interest of $3,600, so $7,200 is not justified by the given data.

In summary, the economic profit correctly equals the accounting profit minus the foregone interest on the withdrawn savings: $9,000 − $3,600 = $5,400. Option a is the correct choice, while options b, c, and d misstate the opportunity costs or misinterpret the given data.

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