Given revenue of 200,000, wages of 100,000, and opportunity cost of owner's capital 30,000, calculate the economic profit.

• A. $70,000
• B. $100,000
• C. $0
• D. $130,000

Answer: (A)

Economic profit includes both explicit costs and the opportunity cost of the owner's resources. Subtract explicit costs from revenue to get accounting profit, then subtract the owner's opportunity cost to get economic profit. Here, revenue is 200,000 and explicit costs (wages) are 100,000, so accounting profit is 100,000. The owner's capital has an opportunity cost of 30,000, so economic profit is 100,000 minus 30,000, which equals 70,000. This shows the business earns 70,000 after considering the cost of using the owner's resources. If you ignored the implicit cost, you'd report 100,000; that would be accounting profit rather than economic profit, which is why the other numbers don't reflect the true economic profit.