Question

The MidNight Hour, LOCl nightclub, earned $100,000 in accounting profit last year. this year the owner, who had invested $1 million in the club, decided to close the club. What can you say about economic profit (and the rate of return) in the nightclub business?

Answer 1

The club earned 100K on a 1M investment. Assuming the owner can fully regain his initial capital, the rate of return ins %10. (If some of the capital is not recoverable, then the rate of return is less than %10, but the exact amount is unknown). The owner decided that his economic profit was zero or less -- That he could have better spent his $1M someplace else.