Question

Question 14 (1 point) Sarah quit her job where she earned $84,000 per year, to start her own economic consulting firm. She invested $72,000 of her own funds in furniture, computers, and other assets. During the first year of operation, the firm's costs were $55,000 for rent on the office building, $220,000 for wages and salaries of employees, and $13,000 for supplies and utilities. The market value of the firm's assets at the end of the year was $64,000. During the year, the firm billed its clients for 3,100 hours at $130 per hour. The typical rate of return on financial investments in the economy was 6%. What was Sarah's economic profit? $26,680 $31,000 O-$41,000 $115,000 $18,680

Answer 1

Economic Profit is the excess of total revnues over total economic costs (explicit & implicit costs). Explicit costs are are actual firm spendings for hired factor services. Eg : Office rent, labour salary, supply expenses. Implicit costs are imputed values of self supplied factor services, eg - interest on owner's capital, salary for owner's management. It also includes opportunity cost sacrifised, eg - next best alternative salary sacrifised.

Economic Profit = Total Revenue - (Explicit costs + Implicit costs)

= Price x Quantity - [(rent + wages & salaries + supplies & utilities + depreciation) + (opportunity cost salary + interest on own capital)]

*depreciation = closing value of assets - opening value of assets = 72000 - 64000 = 8000

* Interest on own capital = own capital x interest = 72000 x 6% = 4320

(3100)(130) - [ (55000 + 220000 + 13000 + 8000*) + (84000 + 4320*) ]   

= $18680