Question

joe runs a small boat factory. he can make ten boats ler year and sell them each at $35,000. it cost joe 250,000 for the raw materials to build ten boats. joe 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 10%) joe can work at a competing factory working on boats for an annual salary of 80,000 per year.

what is the total revenue joe can earn in year 1?

what is the value of joes accounting profit and joes economic profit?

is it truly profitable for joe to operate his boat factory? explain.

Answer 1

Solution-

1. What is the total revenue joe can earn in year 1?

Total Revenue = Selling Quantity x Selling Price.

= 10 x $35,000

= $3,50,000

Total Revenue of joe in year 1 is $3,50,000

2. What is the value of joes accounting profit

Accounting Profit = Total Revenue - Total Cost.

Total cost = $250000 + (300000 x 0.10)

= $250000 + $30,000

= $2,80,000

Profit = $3,50,000 - $2,80,000

= $70,000

Therefore, Joe's accounting profit is $70,000

3. Economic profit?

economic profit = Total revenue - total opportunity costs of producing ten boats (explicit and implicit)

total opportunity costs of producing ten boats (explicit and implicit) = $2,50,000 + ($200000 + $300000 x 0.10) + $80,000

= $2,50,000 + $50,000 + $80,000

= $3,80,000

Economic Profit = $3,50,000 - $3,80,000

= -$30,000

Joe's Economic Loss is $30,000

3. Is it truly profitable for joe to operate his boat factory? explain.

No. Joe could make $80,000 plus 10 percent interest on his $200,000 financial capital for a total of $100,000 if he worked for the competition instead of running his own factory. His factory makes an accounting profit of only $70,000 per year so it costs him $30,000 to run his own factory (the size of the economic loss).