Question

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for ​$80 comma 000 a​ year, and he pays workers ​$140 comma 000 in wages. In​ return, he produces 100 comma 000 baskets of peaches per​ year, which sell for ​$3.00 each. Suppose the interest rate on savings is 2 percent and that the farmer could otherwise have earned ​$45 comma 000 as a shoe salesman.
What is the​ farmer's economic​ profit?
The peach farmer earns economic profit of ​$
??. ​(Enter your response as an​ integer.)
What is the​ farmer's accounting​ profit?
The peach farmer earns accounting profit of ​$
??. ​(Enter your response as an​ integer.)

Answer 1

Rent of equipment = $80,000

Wages = $140,000

Farmer has used his own saving of $1,000,000 to purchase land. This saving could have earned an interest of 2% per year.

Foregone interest = $1,000,000 * 0.02 = $20,000

The foregone interest is $20,000.

The farmer could have worked as shoe salesman instead of doing farming and could have earned $45,000 per year.

The foregone salary is $45,000

Total revenue = Total output * Price = 100,000 * $3 = $300,000

The total revenue is $300,000.

Calculate the farmer's economic profit -

Economic profit = Total revenue - Rent of equipment - Wages - Foregone interest - Foregone salary

Economic profit = $300,000 - $80,000 - $140,000 - $20,000 - $45,000

Economic profit = $15,000

Thus,

The peach farmer earns economic profit of $15,000.

Calculate the farmer's accounting profit -

Accounting profit = Total revenue - Rent of equipment - Wages

Accounting profit = $300,000 - $80,000 - $140,000

Accounting profit = $80,000

The peach farmer earns accounting profit of $80,000.