Question

During a year of operation, a firm collects $1,200,000 in revenue and spends $865,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $250,000 of their own money to the firm instead of investing the money and earning a 9.5 percent annual rate of return. a. The explicit costs of the firm are $________. The implicit costs are $________. Total economic cost is $________. b. The firm earns economic profit of $________. c. The firm’s accounting profit is $________. d. If the owners could earn 15 percent annually on the money they have invested in the firm, the economic profit of the firm would be ________.

please show work so I can learn this

Answer 1

a) Explicit cost is the cost incurred on raw materials, labor expense, utilities, and rent. Therefore, the explicit costs of the firm are $865,000

Implicit cost is the interest foregone on the money invested in the firm. Therefore, implicit cost of the firm is equal to $250,000 * 9.5% = $23,750

Total Economic cost = Explicit Cost + Implicit cost = $865,000 + $23,750 = $888,750

b) Economic profit = Total Revenue ? Total Economic Cost = $1,200,000 - $888,750 = $311,250

c) Accounting Profit = Total Revenue ? Explicit Cost = $1,200,000 - $865,000 = $335,000

d) If the rate of return is 15%, the implicit cost is $250,000 * 15% = $37,500

Total Economic cost = Explicit Cost + Implicit cost = $865,000 + $37,500 = $902,500

Economic profit = Total Revenue ? Total Economic Cost = $1,200,000 - $902,500 = $297,500