Naila runs a small pottery business producing 1,000 items annually, each sold at Rs 100. The raw materials cost her Rs 20,000 for these 1,000 pieces. She has invested Rs 100,000 in the factory and equipment, half from her own savings and half borrowed at an interest rate of 10%. (Assume she could have alternatively invested her own money elsewhere at 10% interest.) Additionally, Naila has the option to work at another pottery factory earning Rs 40,000 per year. What is the economic profit from Naila's pottery business?
Explanation
Total revenue is Rs 100,000 (1,000 pieces × Rs 100). Raw material costs are Rs 20,000. Interest on borrowed funds is Rs 5,000 (Rs 50,000 × 10%). The opportunity cost of her own capital is Rs 5,000 (Rs 50,000 × 10%). Additionally, the foregone salary from working elsewhere is Rs 40,000. Therefore, economic profit = Revenue - (Raw materials + Interest + Opportunity cost of capital + Foregone salary) = 100,000 - (20,000 + 5,000 + 5,000 + 40,000) = Rs 30,000.