Dr. Max ran a dentist office and he made about $120,000 a year. He had $300,000 in investments and earned a return of, on average, 12 % each year. He also earned $5,000 a year coaching the local high school basketball team.
On a whim, Dr. Max decided to change his life - he got beach fever and decided to buy and run a beach bar in Grayton Beach, Florida on the Panhandle. Of course, he had to resign as coach and give up his dental practice. He had to cash in his $300,000 to buy the bar. He is now happily selling beach drinks at his bar, and he made about $420,000 in total revenue with $270,000 in total costs (it is a popular bar. )
11) What is his accounting profit?
12) What is his economic profit?
Accounting profit = revenue - cost
= 420000 - 270000= 150000
Economic profit = accounting profit - opportunity cost
Opportunity cost is the income let go when he was a dentist and a coach
Opportunity cost = 120000 - 0.12(300000) + 5000= 161000
Economic profit = 150000-161000= -11000
Dr. Max ran a dentist office and he made about $120,000 a year. He had $300,000...
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