Frank Rizzo asked:
Maria imports sweaters from Peru and sells them from her home. She collects $400,000 in revenue a year, and spends $200,000 on the sweaters and shipping costs, as well as $25,000 on accounting services and utilities. She used to make $100,000 per year working for an advertising agency. Now she works out of the basement of her house, for which she doesn’t have any other marketable use. She has no other expenses.
If Maria’s Accounting profit is: $175,000.00
What is Maria’s economic profit?
Economic profit is
The value that remains after all costs, including the opportunity costs of the operator’s labor and capital, have been subtracted from gross
$175,000 less cost of money and what the money might have returned invested in another venue.
The story suggests that Maria could earn $100,000 salary had she kept her old job instead of opening her current business. Since that $100,000 is the opportunity cost of running her current business, it represents an implicit cost that should be deducted from her accounting profit to yield an economic profit of 400,000-200,000-25,000-100,000=$75,00 per-year.
As you defined yourself and as explained above:
Accounting profit=400K-200K-25K=175K
But had she been putting her efforts in her previous job she’d have made 100K. That’s the opportunity she has forgone by doing her own business.
Therefore, Maria is better off by 175K-100K=75K.
That’s her economic profit.
Note that had her accounting profit been say 75K only, then despite her accounting profit, she’d have made an economic loss. She’d have been better off staying in her job rather than do her own import business.