Philip owns and operates a gas station.Philip works 40 hours a week managing the station but doesn't draw a salary.He could earn $600 a week doing the same work for Terrance.The station owes the bank $100,000 and Philip has invested $100,000 of his own money.If Philip's accounting profits are $1,000 per week while the interest on his bank debt is $500 per week, the business's economic profits are

A) $500 per week.
B) $100 per week.
C) $400 per week.
D) $0 per week.
E) $1,000 per week.

Question

Emily Jackson · Accepted Answer

Final Answer : B, Explanation :  Accounting profits only take into account explicit costs (such as interest on bank debt) but not implicit costs (such as the opportunity cost of Philip's time and investment). To calculate economic profits, we need to subtract both explicit and implicit costs from total revenue.Total revenue = accounting profits + implicit costsTotal revenue = $1,000 + $600 (opportunity cost of Philip's time)Total revenue = $1,600Total costs = explicit costs + implicit costsTotal costs = $500 (interest on bank debt) + $600 (opportunity cost of Philip's time)Total costs = $1,100Economic profits = total revenue - total costsEconomic profits = $1,600 - $1,100Economic profits = $500 per week.Therefore, the business's economic profits are $500 per week.

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