Tanya imports sweaters from Scotland and sells them from her home. She collects

Question

Tanya imports sweaters from Scotland and sells them from her home. She collects 400,000 euros in revenue a year, and spends 200,000 euros on the sweaters and shipping costs, as well as 25,000 euros on accounting services and utilities. She used to make 100,000 euros per year working for an advertising agency. Now she works out of the basement of her house, for which she doesn't have any other marketable use. She has no other expenses.

8.1. Tanya's accounting profit is:




A. -25,000 euros

B. 200,000 euros

C. 75,000 euros

D. 175,000 euros
8.2. Tanya's economic profit is:




A. 100,000 euros

B. 75,000 euros

C. -25,000 euros

D. 175,000 euros

Explanation / Answer

The accounting profit is 175,000 (d), which is the revenues minus the explicit costs. The economic profit is 75,000 (b) which is the accounting profit minus the implicit costs (Tanya's opportunity cost of running the business).

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