Question

George owns a ranch in Montana. He pays $22,000 per year in insurance, $100,000 in wages, and $23,000 in supplies. He could have earned $58,000 per year as a police officer if he didn't own the ranch. His total revenue last year equaled $200,000. That means his economic _____ equaled _____.

Answer 1

The correct answer is

Economic profit equaled - $ 3000

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Economic profit = Total revenue - Total costs

Total costs = Explict costs + Implicit costs

Explicit costs = Cost of insurance + Cost of wages + Cost of supplies

Explicit costs = $ 22,000 + $ 100,000 + $ 23,000 = $ 145,000

Implicit costs = Opportunity cost per year working as a police officer

Implicit costs = $ 58,000

Economic profit = $ 200,000 - [ $ 145,000 + $ 58,000 ]

Economic profit = - $ 3000