Answer to Question #155463 in Accounting for l

Question

You are planning to invest $10,000 into the stock for one company. You research various investment options and identify two possibilities: Citigroup and Wells Fargo. You decide to invest in Citigroup. A year later, your Citigroup investment is worth $13,340. You look at Wells Fargo. Had you invested in Wells Fargo, your investment would now be worth $10,320. What is your economic profit?

Answer 1

$\bold {Answer}$

Economic profit $= \$3,020$

$\bold {Solution}$

Economic profit

= Revenue - Explicit costs - implicit costs

Income from Citigroup investment

= $13,340 - $10,000

= $3,340

Possible income from Wells Fargo investment

= $10,320 - $10,000

= $320

There are no explicit costs mentioned, attached to Citigroup investment. However, investing in Citigroup would result in an opportunity cost of $320 forgone revenue had the investment been made in Wells Fargo.

The $320 opportunity cost is the only implicit cost associated with the Citigroup investment.

Therefore,

Economic profit = $3,340 - $320

= $3,020