Q.A shopkeeper's total revenue for the year was Rs. 6,00,000. Out of this, the shopkeeper actually paid out Rs. 1,50,000 as wages to hired assistants and Rs. 30,000 as interest on borrowed capital (the shop premises were owned by the shopkeeper, not rented). Compute the shopkeeper's Gross Profit. The shopkeeper had also invested Rs. 2,00,000 of their OWN capital in the business (which could otherwise have earned 10% per annum interest if lent out at the market rate) and personally supplied their OWN labour of management (which could otherwise have been hired out for Rs. 60,000 per annum elsewhere). Compute the shopkeeper's Net Profit.

Gross Profit deducts only the EXPLICIT costs actually paid out; Net Profit goes further and also deducts the IMPLICIT (imputed) cost of the entrepreneur's own capital and own labour of management.

Gross Profit $=600000-(150000+30000)=$ Rs. 4,20,000. …

Gross Profit is Total Revenue minus all EXPLICIT (actually paid-out) costs:

To find Net Profit, the IMPLICIT (imputed) costs of the entrepreneur's own resources must also be deducted — these are the incomes the entrepreneur forgoes by using their own capital and own labour in the business, instead of hiring them out elsewhere:

• Imputed interest on own capital $=10\%$ of Rs. 2,00,000 $=$ Rs. 20,000
• Imputed wage of own management $=$ Rs. 60,000

Total implicit costs $=20{,}000+60{,}000=\text{Rs. }80{,}000$. …

A common slip is stopping at Gross Profit and treating it as the entrepreneur's "true" profit — this ignores that the entrepreneur's OWN capital and OWN labour are not actually free, since both had a genuine opportunity cost (10% interest and R …