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 expenses, utilities and rent. The owners of the firm have provided $500,000 of their own money to the firm (and view that money as a loan to the firm) instead of investing the money and earning a 14 percent annual rate of return.
a. The explicit costs of the firm are $____. The implicit costs are $____. Total economic cost is $_____
b. The firm earns economic profit of $_____
c. If the owners could earn 20 percent annually on the money they have invested in the firm, the economic profit of the firm would be _____ ( when revenue is $175,000)

Explanation / Answer

A) 1. EXPLICIT COST = $80,000, IMPLICIT COST =$70,000 (500,000+14%=570,000) 570,000-500,000=70,000 ECONOMIC COST = $150,000 (70,000+80,000) implicit + explicit B) ECONOMIC PROFIT = $25,000 (175,000-70,000-80,000) REVENUE-IMPLICIT COST- EXPLICIT COST C) ACCOUNT PROFIT=$95,000 (175,000-80,000) REVENUE-EXPLICIT COST D) =-5,000 (500,000+20%=600,000 SO, 500,000-600,000=100,000, IMPLICIT COST ARE$100,000. SO, 175,000(REV)-100,000(IMPLICIT)-80,000(EXPLICIT)=-5000

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