Question

Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year.

At the end of the first year of operating his new business, Victor’s accountant reported an accounting profit of $150,000. What was Victor’s economic profit?
a. -$150,000
b. -$50,000
c. -$25,000
d. $25,000

What is Victor’s opportunity costs of operating his new business?
a. $25,000
b. $75,000
c. $100,000
d. $175,000

How large would Victor's accounting profits need to be to allow him to attain zero economic profit?
a. $100,000
b. $125,000
c. $175,000
d. $225,000

Answer 1

1) Economic profit = accounting profit - implicit costs

= 150000-(100000+75000)

= -25000

option(C)

2) Oppirtunty cost = implict costs = 175000

option(D)

3) Accounitng profits should be equal to 150000+25000 = 175000

option(C)