Question

Show me the formulas for explicit cost, implicit cost, accouting profit, and economic profit. Tell me what to do for problems a-d.

ASSUME THAT YOU OWN AN ENGINEERING FIRM THAT HAS THE FOLLOWING COST AND REVENUE INFORMATION FOR LAST YEAR: ........ -total revenue from operations $650,000 $650, 165,000 -wages of clerks and assistants -$100,000 of your money is invested in the firm; it could earn 5% interest if invested elsewhere (.05 x $100,000) . 5,000 -cost of inventory, supplies, and equipment ... 75,000 -you own the building, it could be rented to another firm for $3,500 per month (12 x $4,500) 54,000 -utilities and taxes 45,000 -you manage the firm; you could earn $95,000 working in the next best alternative 95,000 Determine each of the following (show all your work): explicit costs implicit costs accounting profit economic profit Briefly explain the difference between implicit and explicit costs e. Implicit explicits cost is is an expenses opportunity costs un are paid.

Answer 1

Ans) Explicit costs are the direct payments made in monetary terms. Eg- rents, wages, raw materials, utilities etc.

Implicit cost are the opportunity cost or the trade offs made. Eg- suppose you work in your own firm, then the wage that you would have earned by working somewhere else.

Accounting profit takes into consideration only the explicit cost and is calculated by using the formula ÷

Accounting profit = Total revenue - explicit cost

Economic profit includes both implicit and explicit cost and is calculated by using the formula ÷

Economic profit = Total revenue - (implicit + explicit cost)

NTONTONLAST TEAR -total revenue from operations $650,000 wages of clerks and assistants 165,000 -$100,000 of your money is invested in the firm; it could earn 5 % interest if invested elsewhere (.05 x $100,000) 5,000 cost of inventory, supplies, and equipment 75,000 you own the building; it could be rented to another firm for $3,500 per month (12 x $4,500) 54,000 atilities and taxes 45,000 you manage the firm; you could earn $95,000 working in the nExt best alternative 95,000

Red = explicit cost, Blue = implicit cost

1) Explicit costs = $165,000 + $75,000 + $45,000 = $285,000

2) Implicit cost = $5,000 + $54,000 + $95,000 = $154,000

3) Accounting profit = $650,000 - $285,000 = $365,000

4) Economic profit = $650,000 -($285,000 + $154,000) = $211,000