A firm pays $200,000 in wages, $50,000 in interest on borrowed money capital, and $70,000 for...

A firm pays $200,000 in wages, $50,000 in interest on borrowed money capital, and $70,000 for the yearly rental of its factory building. If the entrepreneur worked for somebody else as a manager she would earn at most $40,000 per year, and if she leant out her money capital to somebody else in a similarly risky business, she would at most receive $10,000 per year. She owns no land or building.

a.   Calculate the entrepreneur’s economic profit if she received $400,000 from selling her year’s output.
b.   How much profit (accounting) is the entrepreneur earning from the point of view of the person on the street (a non-economist)? To what is the difference in the results due?
c.   What would happen if the entrepreneur’s total revenue were reduced to $360,000?

Expert Solution

Rahul Sunny answered 2 years ago

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