Question

A firm owned by an investor who invested $500, 000 earns a profit of $150, 000 a year. The best investment alternative for the investor is a portfolio of stocks and bonds earning a return of 12%. What is the economic profit?

Answer 1

Economic profit = Revenue - Opportunity cost
Opportunity cost = ($500 000 * 12%)/100% = $60 000
Economic profit = $150 000 - $60 000 = $90 000