Question

Gerry works 40 hours a week managing Gerry’s Market, without drawing a salary. He could earn $600 a week doing the same work for Jean. Gerry’s Market owes its bank $100,000, and Gerry has invested $100,000 of his own money. If Gerry’s accounting profits are $1,000 per week while the interest on his bank debt is $200 per week, his economic profits are:

Answer 1

Answer:

The correct response is "$395 per week".

Explanation:

Given:

Salary forgone,

= $600

Dividend forgone,

= $5

Accounting profit,

= $1,000

Now,

The implicit cost will be:

= $Salary \ forgone+Dividend \ forgone$

By substituting the values, we get

= $600+5$

= $605$ ($) per week

hence,

The economic profit will be:

= $Accounting \ profit-Implicit \ cost$

= $1000-605$

= $395$ ($) per week