Multiple choice

Suppose that a sole proprietorship is earning a total revenue of Rs. 1,00,000 and is incurring explicit cost of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that

  1. the firm is incurring an economic loss

  2. implicit costs are Rs. 25,000

  3. the total economic costs are Rs. 1,00,000

  4. the individual is earning an economic profit of Rs 25,000
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A Correct answer
Explanation

Economic profit = Total Revenue - (Explicit Costs + Implicit Costs). Here: TR = Rs. 1,00,000, Explicit costs = Rs. 75,000, Implicit cost (owner's forgone salary) = Rs. 30,000. Total economic cost = 75,000 + 30,000 = Rs. 1,05,000. Economic profit = 1,00,000 - 1,05,000 = -Rs. 5,000 (a loss). The owner earns Rs. 25,000 accounting profit but less than their opportunity cost, so economic loss.

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