Question

Mark runs a small boat factory. He can make ten boats per year and sell them each at 50,000 each. It cost Mark 275,000 for the raw materials to build the ten boats. Mark has invested 500,000 dollars in the boat factory building. (200,000 from saving and 300,000 from small business loans at an annual rate of 5 percent=he just refinanced his business loan). Mark can work at a competing factory working on boats for an annual salary of 80,000 per year.

10a. What is the total revenue Mark can earn in year 1?

10b. What is the value of Mark's accounting profit and Joe's economic profit?

10c. Is it truly profitable for Mark to operate his boat factory? Explain.

Answer 1

(a) Mark make 10 boats and sell them each at 50,000 each.

Total revenue = 10 * 50,000

=> Total revenue = 500,000

-----------------

(b)

Explicit cost is the actual monetary expenses.

Explicit cost will include cost of raw material, interest payment on borrowed money.

Note: Mark borrowed 300,000 at 5% interest rate.

Interest payment on borrowed money = 300,000 * 0.05 = 15,000

Explicit cost = 275000 + 15000 = 290,000

-------

Implicit cost is the opportunity costs of self-owned resources.

Implicit cost will include the foregone interest income which Mark could earn on thier own saving and the foregone salary which Mark could earn at competiting factory.

Note: Mark could earn 5% interest on their own saving of 200,000

Foregone interest income on 200,000 = 200,000 * 0.05 = 10,000

Implicit cost = 80,000 + 10,000 = 90,000.

Accounting profit = Total revenue - Explicit cost

=> Accounting profit = 500,000 - 290,000

=> Accounting profit = 210,000

----

Economic profit = Total revenue - explcit cost - implicit cost

=> Economic profit = 500,000 - 290,000 - 80,000

=> Economic profit = 130,000

-------------------------------------------------------

(C) The Mark's economic profit is positive which means it is truly profitable for Mark to operate on his boat factory.