Question

Colonel Mais is a corn farmer who lives in Chilliwack, BC. His rental payments for land and
equipment come to $15,000/year, and other supplies cost $13,000/year. The only input the Colonel
personally supplies is his own labor, and he considers farming just as attractive as his only other
employment opportunity, managing a retail store at a salary of $25,000/year. Apart from the matter of
pay, the Colonel is indifferent between farming and being a manager. The Colonel’s revenue from corn
sales is $50,000 per year.
[a] What is the dollar amount of the Colonel’s accounting profit/year?

[b] What is the dollar amount of the Colonel’s economic profit/year?

[c] What revenue/year would the Colonel need to just make an economic profit of $0?

Answer 1

a) Explicit costs = 15,000 + 13,000 = $28,000

    Implicit costs = $25,000

    Total Revenue = $50,000

Colonel’s accounting profit/year = Total Revenue - Explicit costs = 50,000 - 28,000 = $22,000

b) Colonel’s economic profit/year = Total Revenue - Explicit costs - Implicit costs

                                                     = 50,000 - 28,000 - 25,000 = -$3,000 [It is a loss]

c) Colonel need a revenue of $53,000 per year to make an economic profit of $0.