Economic Profit Watch

1. Nicole owns a small pottery shop. She can make 1,000 pieces of pottery per
year and sell them for €100 each. It costs Nicole €20,000 for the raw materials
to produce the 1,000 pieces of pottery. She has invested €100,000 in her shop
and in equipment; €50,000 from her savings and €50,000 borrowed at 10% (we
will assume also that she could also have got 10% if she had put her savings
into a bank). Nicole can work at a competing local pottery factory for €40,000
per year. The economic profit at Nicole’s pottery shop is

a. €80,000
b. €30,000
c. €75,000
d. €70,000
e. €35,000
Is the answer e. because her sales profit is €80 000, minus the €5 000 interest on the loan and the €40 000 opportunity cost of not taking the other job?
2. (Original post by TOSCS)
Is the answer e. because her sales profit is €80 000, minus the €5 000 interest on the loan and the €40 000 opportunity cost of not taking the other job?
She could have also put her €50,000 savings in the bank and get 10% out of those, so another €5,000 forgone. The correct answer is B then (?).
3. (Original post by goldsilvy)
She could have also put her €50,000 savings in the bank and get 10% out of those, so another €5,000 forgone. The correct answer is B then (?).
Ah yes, I knew there was a reason they mentioned the 10% on savings.

Bump for confirmation

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Updated: December 12, 2010
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