The Southern Tree Trimming Corporation reported an accounting profit of $35,000 and a normal rate of return of 15 percent on capital and enterprise of $30,000. The opportunity cost of labor is $15,500. What is the economic profit?
$110,500
X $19,500
$15,000
$5,000
To calculate economic profit, we need to consider the opportunity cost of all resources used in the production process.
The formula for economic profit is:
Economic Profit = Accounting Profit - Opportunity Cost
In this case, the accounting profit is given as $35,000.
The opportunity cost of labor is $15,500.
We need to calculate the opportunity cost of capital and enterprise. The normal rate of return on capital and enterprise is given as 15 percent. The capital and enterprise used in production is $30,000. The opportunity cost can be calculated as:
Opportunity Cost of capital and enterprise = Normal Rate of Return * Capital and Enterprise
Opportunity Cost of capital and enterprise = 15% * $30,000 = $4,500
Now, let's calculate the economic profit:
Economic Profit = Accounting Profit - Opportunity Cost
Economic Profit = $35,000 - ($15,500 + $4,500)
Economic Profit = $35,000 - $20,000
Economic Profit = $15,000
Therefore, the economic profit is $15,000. So the correct answer is option C: $15,000.