Question

Lakisha is a professor of economics. She is currently earning $100,000 a year as a professor. She decides to quit her job as a professor and opens a consulting firm. In order to do this, she cashes out her retirement fund of $200,000. Her retirement fund has been earning 10% interest each year. At the end of her first year as an economic consultant, she earns $120,000 in accounting profit. What was her economic profit for the year?

Answer 1

Answer:

The correct answer is $0.

Explanation:

According to the scenario, computation of the given data are as follows:

Accounting Profit = $120,000

Current earning = $100,000

retirement fund = $200,000

Interest from retirement fund = 10% × $200,000 = $20,000

So, we can calculate the economic profit by using following formula:

Economic profit = Accounting profit - Current earning - Interest from retirement fund

By putting the value, we get

= $120,000 - $100,000 - $20,000

= $20,000 - $20,000

= $0

Answer 2

Lkisha economic profit for the year equal $0

Economic profit is the profit derived after deduction of costs of inputs and opportunity cost from revenue made from sale of output.

• The Formula to use to calculate Lkisha economic profit is {Accounting profit - Salary given up - Interest from retirement fund given up}

Given Information

Accounting Profit = $120,000

Current earning = $100,000

Retirement fund = $200,000

Economic Profit = $120,000 + $100,000 - (200,000 * 10%)

Economic Profit = $120,000 + $100,000 - $20,000

Economic Profit = $0

Therefore, Lkisha economic profit for the year equal $0.

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