Question

Costs HW-Ch 9 Check my w Gomez runs a small pottery firm. He hires one helper at $14,500 per year, pays annual rent of $7,500 for his shop, and spends $18,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $5,000 per year if alternatively invested. He has been offered $23,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $6,000 per year. Total annual revenue from pottery sales is $86,000 Instructions: Enter your answers as whole numbers a. Calculate the accounting profit for Gomez's pottery form b. Now calculate Gomez's economic profit

Answer 1

Explicit cost implies actual out off pocket expenses.

Implicit cost implies the opportunity cost of doing some event.

Explicit cost = $40000  (= $14500 for helper + $7500 for rent + $18000 for materials)

Implicit cost = $34000 (= $5000 of forgone interest + $23000 of salary + $6000 of enterpreneurship)

Accounting profit = revenue - explicit cost

Accounting profit = $86000 - $40000

Accounting Profit = $46000

Economic profit = Revenue - explicit cost - implicit cost

Economis profit = $86000 - $40000 - $34000

Economic Profit = $12000