The Midnight hour a local nightclub earned $100,000 in accounting profit last year. This year the owner, who had invested $1million in the club, decided to close the club. What can you say about economic profit (and the rate of return) in the nightclub business?

a) you could say the nightclub had zero or negitive economic profits.

b) The rate of return on capital in the nightclub business is 10%

To determine the economic profit and rate of return in the nightclub business, we need to consider both the accounting profit and the invested capital.

Accounting profit refers to the revenue generated minus explicit costs, such as operating expenses and wages. In this case, the club earned $100,000 in accounting profit last year.

However, economic profit takes into account implicit or opportunity costs – the return on investment that the owner could have earned elsewhere. In this case, the owner invested $1 million in the club.

To calculate economic profit, we need to subtract the opportunity cost of the invested capital from the accounting profit. If the owner could have earned, for example, a 10% return on that $1 million elsewhere, the opportunity cost would be $100,000 per year (10% return on $1 million).

So, if the accounting profit is $100,000 and the opportunity cost is also $100,000, the economic profit would be $0. This means that the owner's return on investment in the nightclub business is zero.

Based on the given information, we can conclude that the economic profit in the nightclub business is zero, indicating that the rate of return is not sufficient to cover the opportunity cost of the invested capital. It may imply that the nightclub business is not profitable enough compared to other investment options the owner could have pursued.