Naila makes 1,000 pieces of pottery a year and sells them for Rs100 each. Raw materials cost Rs20,000. She has invested Rs100,000 in her factory and equipment: Rs50,000 of her own savings and Rs50,000 borrowed at 10 percent (she could also have lent her own money at 10 percent). She could earn Rs40,000 a year at a rival pottery factory. What is the economic profit of her factory?
Correct answer B. Rs30,000
Explanation
Revenue of Rs100,000 minus explicit costs (Rs20,000 materials plus Rs5,000 interest) and implicit costs (Rs5,000 forgone interest plus Rs40,000 forgone salary) leaves Rs30,000.
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