Question

Suppose a farmer in Georgia begins to grow peaches. He uses $1,000,000 in savings to purchase land, he rents equipment for $50,000 a year, and he pays workers $100,000 in wages. In return, he produces 250,000 baskets of peaches per year, which sell for $4.00 each. Suppose the interest rate on savings is 3 percent and that the farmer could otherwise have earned $45,000 as a shoe salesman. What is the farmer's economic profit? The peach farmer earns economic profit of $ (Enter your response as an integer.) What is the farmer's accounting profit? The peach farmer earns accounting profit of $ . (Enter your response as an integer.)

Answer 1

Answer

Accounting profit=total revenue -explicit costs

Total revenue =quantity * price=250000*4=1000000

Explicit costs =rent on equipment’s +salary to workers

=50000+100000=150000

Accounting profit =1000000-150000

=850000

Implicit costs =interest on the saving +shoe salesmen salary

=1000000*0.03+45000

=75000

Economic profit=accounting profit -implicit costs

=850000-75000

=775000

Economic profit is $775000 and accounting profit is $850000