M took 25000 out of her bank account to buy a commercial hem

M took $25,000 out of her bank account to buy a commercial hemp necklace weaver to use for her necklace making business. Her bank account gives her 2 percent interest per year. During the first year of her business M sold 4,500 necklaces for $2.50 each. During this year her necklace making business incurred $3,000 in explicit costs for mainly materials. M\'s weaver has not depreciated at all in the first year of business. Were M not working for herself making necklaces, she’d be working 20 hours a week, for 40 weeks at $8 an hour. M\'s economic profit for the year was

A. $1,350.

B. $7,750.

C. $11,250.

D. $0.

E. $-23,150

Solution

Revenue = 4,500 x $2.5 = $11,250

Explicit cost = $3,000

Implicit cost = Interest foregone + Alternative earnings foregone

= $25,000 x 2% + $8 x 20 x 40 = $(500 + 6,400) = $6,900

Economic cost = Explicit cost + Implicit cost = $(3,000 + 6,900) = $9,900

Economic profit = Revenue - Economic cost = $(11,250 - 9,900) = $1,350

Correct option (A).