In: Economics
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).