Question

A firm has $200 million in total revenue and explicit costs of $190 million. Suppose its owners have invested $100 million in the company at an opportunity cost of 10 percent interest rate per year. The firm's economic profit is:_________.1. $400 million2. $100 million3. $80 million4. Zero

Answer 1

Answer:

4. Zero

Explanation:

Economic profit / loss is the net of the sale amount and all the costs including any opportunity cost.

According to the given data

Total revenue = $200 million

Total cost / Accounting cost/ Explicit cost = $190 million

Implicit cost / opportunity cost = $100 x 10% = $10 million

The Economic profit can be determined by the following formula:

Economic Profit = Revenue - ( Explicit cost + Implicit cost )

Or

Economic Profit = Revenue - ( Accounting cost + Opportunity cost )

Economic Profit = $200 million - ( $190 million + $10 million )

Economic Profit = $200 million - $200 million

Economic Profit = $0