02 Question (2 points) C See page 246 Although Goldman Sachs paid Heather $90000

Question

02 Question (2 points) C See page 246 Although Goldman Sachs paid Heather $90000.00 per year, she was not satisfied with her job. She had loved going white-water rafting and skiing with her family in Utah since she was a little girl. So last year, she decided to open her own business: Family Adventures. During the summer, she takes families on different white-water trips, and in the winter, she leads clients on skiing trips. To start her business, Heather borrowed $100,000 from a bank and used $90000.00 of her savings. Her savings earned 10% interest. At the end of the year, she wanted to know whether her new business venture was worthwhile. The table below lists her total revenue and itemized costs for Family Adventures. tem nnual Dollar Value otal revenue 300000.00 $140000.00 Employee wages Rent on her business office 25,000.00 10,000.00 5,000.00 ents on bank loan tility and gas expenses 1st attempt Part 1 (1 point) Q See Hint Family Adventure s' accounting profit was $ Part 2 (1 point) Q See Hint Family Adventures' economic profit was $ (If the economic profit is less than zero, be sure to include the- sign.)

Explanation / Answer

Part 1: Accounting profit = total revenue - total cost = $300,000 - $(140,000 + 25,000 + 10,000 + 5,000) = $300,000 - $180,000 = $120,000.

Note: Accounting profit does not consider opportunity cost. Here there are two opportunity cost - 1) the $90,000 salary foregone at Goldman Sachs and 2) the interest loss of 10% of 90,000 = $9,000.

Part 2: Economic profit = accounting profit - opportunity costs = $120,000 - ($90,000 + $9,000) = $120,000 - $99,000 = $21,000.

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