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Suppose an assistant professor of economics is earning a salary of $75,000 per year. One day she quits her job, sells $100,000 worth of bonds that had been earning 5 percent per year, and uses the funds to open a bookstore. At the end of the year, she shows an accounting profit of $90,000 on her income tax return. What is her economic profit?

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Answer:

Economic profit  $10,000

Explanation:

Income earned as an assistant professor = Salary + Interest on bonds = 75000 + 5% on 100,000 = 75000 + 5000

Income earned as an assistant professor = $80,000

Income from the bookstrore = $90,000

In calculating economic profit, opportunity costs are deducted from revenues earned.

Economic profit = $90,000 - $80,000 = $10,000

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