Question

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials,...

  1. Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner-manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year.
  1. What are the annual explicit costs for the firm described above?

  1. What are the annual implicit costs for the firm described above?

  1. What are the annual economic costs for the firm described above?

  1. What is the accounting profit for the firm described above?

  1. What is the economic profit for the firm described above?
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Answer #1

Annual Explicit Cost=Wages and salaries+ Materials+ New Equipment+ Rented Property+ Interest Cost on capital

Annual Explicit Cost= 200000+75000+30000+20000+35000= $360000

Annual Implicit Cost= Income that owner-manager could receive working elsewhere.

Annual Implicit Cost= $90000

​​​​​​Annual Economic Costs for the firm= Explicit Costs+ Implicit costs= $360000+$90000= $450000

Accounting profit for the Firm= Annual Revenues– Annual Explicit Cost= 360000–360000= $0.

Economic Profit for the firm= Annual Revenues– Annual Explicit Cost– Annual Implicit Cost

Economic Profit for the Firm= 360000–360000–90000= –$ 90000. ( Here economic Profits are Negative, it means that the firm is suffering economic loss).

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