During a year of operation, a firm collects $175,000 in revenue and spends $80,0

Question

During a year of operation, a firm collects $175,000 in revenue and spends $80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return.

The explicit cost of the firm are $______. The implicit costs are $______. Total economic cost is $_______.

The firm earns economic profit of $_______.

The firm’s accounting profit is $________.

If the owners could earn 20 percent annually on the money they have invested in the firm, the economic profit on the firm would be _______ (when revenue is $175,000).

Explanation / Answer

The explicit cost is the out of pocket cost incurred by a firm. In this case its $80,000.

Implicit cost is $570,000, that is, $500,000+14% of $500,000. which is own resources.

Total cost is $80,000+$570,000 = $650,000

Accounting profit = Revenue-cost = $175,000-$80,000 = $95,000 (this excludes the implicit costs, only explicit costs are added)

Economic profit = Revenue-cost = (implicit costs are also added into it) 175000-570,000-80,000 = -$475000.

Economic profit when rate of return is 20%, so 500,000+20% of 500,000 = $600,000.

Economic profit = 175000-600,000-80,000 = $590,5000.

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