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Economics

The firm generated $175,000 in revenue and spent $80,000 in explicit costs. The owners invested $500,000 in the firm rather than earning a 14% return elsewhere. The firm's explicit costs were $80,000, implicit costs from forgone investment returns were $70,000, and total economic costs were $150,000. The firm earned an economic profit of $25,000 and an accounting profit of $95,000. If investment returns were 20% instead of 14%, the firm's economic profit would be -$5,000.

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547 views1 page

Economics

The firm generated $175,000 in revenue and spent $80,000 in explicit costs. The owners invested $500,000 in the firm rather than earning a 14% return elsewhere. The firm's explicit costs were $80,000, implicit costs from forgone investment returns were $70,000, and total economic costs were $150,000. The firm earned an economic profit of $25,000 and an accounting profit of $95,000. If investment returns were 20% instead of 14%, the firm's economic profit would be -$5,000.

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Anonymous 7Un6mnqJzN
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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During a year of operation, a firm collects $ 175,000 in revenue and spends $ 80,000 on

raw materials, labor expense, utilities, and rent. The owners of the firm have provided $
500,000 of their own money to the firm instead of investing the money and earning a 14
percent annual rate of return.
a. The explicit costs of the firm are $______ . The implicit costs are $ . Total economic
cost is $_____ .

Explicit costs = $80,000


Implicit costs = $500,000 X 0.14= $70,000 (opp. costs of capital)
Total Economic cost = Explicit cost + Implicit cost = $80,000+$70,000 = $150,000.

b. The firm earns economic profit of $_____ .

Economic profit = Total Revenue Total Economic Cost = $175,000 $150,000 = $25,000.

c. The firms accounting profit is $_______.

Accounting Profit = Total Revenue Explicit Cost (Accounting Cost)


= $175,000 $80,000 = $95,000.

d. If the owners could earn 20 percent annually on the money they have invested in
the firm, the economic profit of the firm would be ________ (when revenue is $
175,000).

Implicit costs = $500,000 X 0.2 = $100,000.


Economic Cost = $80,000+$100,000 = $180,000.
Economic Profit = $175,000 $180,000 = $5,000.

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