Question

alpha lumber co. has the following short-run total costs:
total explicit cost=$40,000
total implicit cost=$20,000
how profitable (economic profit, normal profit or economic loss) is the company in each of the following cases:
A. Total revenue=$65,000
B. Total revenue=$60,000
C. Total revenue=$55,000

Answer 1

Explanations:

Explicit cost: This is the cost for which money has been spent; like salary payment, interest payment, etc.

Implicit cost: This is not out-of-pocket expense but still important; like owner’s time and labor in the business.

Economic profit: This is the excess of total revenues over total cost.

Normal profit: This is the stage where economic profit is 0; (normal profit = economic profit = 0)

Economic loss: This is the excess of total cost over total revenues.

A.

There is economic profit, since total revenue is greater than total cost.

Economic profit = Total revenue – Total cost

                           = 65,000 – (explicit + implicit)

                           = 65,000 – (40,000 + 20,000)

                           = 65,000 – 60,000

                           = $5,000 (Answer)

B.

There is normal profit, since total revenue is equal to total cost.

Normal profit = Total revenue – Total cost

                        = 60,000 – (explicit + implicit)

                        = 60,000 – (40,000 + 20,000)

                        = 60,000 – 60,000

                        = 0 (Answer)

C.

There is economic loss, since total revenue is greater than total cost.

Economic loss = Total cost – Total revenue

                           = (explicit + implicit) – 55,000

                           = (40,000 + 20,000) – 55,000

                           = 60,000 – 55,000

                           = $5,000 (Answer)