CMA Foundation · Fundamentals of Business Economics and Management · Utility, Wealth, Production
Sunita quits a job paying ₹6,00,000 a year to run her own bakery. In the first year she earns revenue of ₹14,00,000 and incurs explicit costs of ₹9,00,000. Treating her forgone salary as an implicit cost, what is her economic profit?
Her economic profit is a loss of ₹1,00,000. Total economic cost is explicit costs of ₹9,00,000 plus the forgone salary of ₹6,00,000, giving ₹15,00,000, against revenue of ₹14,00,000. Accounting profit of ₹5,00,000 ignores the opportunity cost of her salary.
- A₹5,00,000
- B₹3,00,000
- C-₹1,00,000Correct
- D₹8,00,000
Explanation
Total economic cost = explicit ₹9,00,000 + implicit ₹6,00,000 = ₹15,00,000. Economic profit = 14,00,000 - 15,00,000 = -₹1,00,000, a loss. The figure ₹5,00,000 is accounting profit, which ignores the opportunity cost of her salary.
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