Question

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1. During a year of operation, a firm collects $175,000 in revenue and spends $80,000 on labor expense, raw materials, rent, and utilities. The firm’s owner has provided $500,000 of her own money instead of investing the money and earning a 14 percent annual rate of return.
   1. The explicit costs of the firm are $_______. The implicit costs are

$ _______________. Total economic cost is $_____________.

2. The firm earns economic profit of $___________________________.

3. The firm’s accounting profit is $_____________________________.

4. If the firm’s costs stay the same but its revenue falls to $____________, only a normal profit is earned.

5. If the owner could earn 20 percent annually on the money she has invested on the firm, the economic profit of the firm would be __________ (when revenue is $175,000).

Answer 1

Explicit costs is cost of business which is actually incurred

Explicit Cost = $ 80,000

The explicit costs of the firm are $ 80,000

Implicit costs is opportunity cost like Interest

Implicit costs = $500,000 *14% = $70,000

The implicit costs are $ 70,000

Economic cost =  Implicit costs + Explicit costs

Economic cost = 70,000 + 80,000 = $ 150,000

Total economic cost is $ 150,000

Economic Profit = Revenue - Ecomomic Cost

Economic Profit = $175,000 - $150,000

Economic Profit = $25,000

The firm earns economic profit of $25,000

Accounting Profit = Revenue - Explicit costs

Accounting Profit = $175,000 - $80,000

Accounting Profit = $ 95,000

The firm’s accounting profit is $95,000

When revenue is fall by ecomomic profit then firm will only earn normal profit.

If the firm’s costs stay the same but its revenue falls to $25,000  only a normal profit is earned.

Implicit costs = $500,000 *20% = $100,000

Explicit Cost = $ 80,000

Total economic Cost = $ 180,000

Economic Profit = Revenue - Ecomomic Cost

Economic Profit = $175,000 - $180,000

Economic Profit = -$5,000

If the owner could earn 20 percent annually on the money she has invested on the firm, the economic profit of the firm would be -$5000 (when revenue is $175,000).

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