2. If you invested $100,000 of your own money in the business and typical investments in this economy earn 10%, then the forgone interest of $10,000 must also be thought of as an economic cost, bringing economic profit to $10,000.

Note: We don't normally consider the $100,000 initial investment a cost because we suppose that it could be recovered if the business were sold. Of course, it would depend on the type of business and how the $100,000 was used. If none of the $100,000 could be recovered costs would include $80,000 (forgone salary) + $100,000 (lost investment) + $10,000 (forgone interest) or $190,000; so losses would be $90,000. The real point of this question is to emphasize that forgone interest earnings are another important cost.

Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved