A small business owner decides to invest $50,000 into a new product line instead of using that money to expand their current operations, which could have generated an additional $70,000 in profits. If the owner reports an accounting profit of $30,000 from the new product line, which of the following best explains the underlying reason for their lower overall economic profit?

The small business owner's decision to invest $50,000 in a new product line instead of expanding current operations involves understanding opportunity cost, which is the value of the next best alternative that is forgone. In this case, by choosing the new product line, the owner misses out on the potential $70,000 in profits that could have been earned from the expansion. Although the new product line generates an accounting profit of $30,000, the overall economic profit is lower because we must consider the opportunity cost of the lost expansion profits. Therefore, the true economic profit is calculated by subtracting both the investment and the opportunity cost from the earnings, which illustrates that the decision led to a lower overall profit. For example, if the owner had expanded, they would have not only avoided the lost $70,000 but also retained the $30,000 profit, leading to a higher total profit.