Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian’s savings account paid 3 percent interest. He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase supplies and earned $50,000 in revenue during his first year. Which of the following statements is correct?a. Sebastian’s economic profit is $16,000, and his accounting profit is $14,600.b. Sebastian’s economic profit is $4,600, and his accounting profit is $35,000.c. Sebastian’s economic profit is $4,000, and his accounting profit is $34,600.d. Sebastian’s economic profit is $16,000, and his accounting profit is $34,600.

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stokholm stokholm · Answer 1 · 2019-07-30T12:27:34+02:00

Answer:

c. Sebastian’s economic profit is $4,000, and his accounting profit is $34,600

Explanation:

Note: Accounting profit is actual profit earned

Here, revenue = $50,000

Expense = $15,000 + $interest cost paid on loan

= $15,000 + $20,000 X 2% = $15,000 + $400 = $15,400

Accounting profit = $50,000 - $15,400 = $34,600

Economic Profit = Accounting profit - Opportunity cost

Opportunity cost is the second best opportunity foregone, for choosing the current option.

Here best opportunity foregone = $30,000 to be earned on job.

Now also interest foregone in addition to the above = $20,000 X 3% = $600

Total opportunity cost = $30,000 +$600 = $30,600

Thus Economic Profit = $34,600 (Accounting Profit) - $30,600 (Opportunity Cost)

= $4,000

Final Answer

c. Sebastian’s economic profit is $4,000, and his accounting profit is $34,600