Question

During a year of operation, a firm collects $450,000 in revenue and spends $100,000 on labor expense, raw materials, rent, and utilities. The firm's owner has provided $750,000 of her own money form her personal portfolio instead of investing the money and earning a 10% annual rate of return. The firm also operates out of a building they own worth $1,000,000 which the owner inherited 25 years ago.

The explicit costs of the firm are $______________.
If the owner could earn 15% annually on the money she has invested in the firm, the economic profit of the firm would be ______________ (when revenue is $450,000).
The implicit costs are $______________.
The firm's accounting profit is $______________.
The firm earns an economic profit of $______________.
Total economic cost is $______________.

Answer 1

The explicit costs of the firm are $100,000 If the owner could earn 15% annually on the money she has invested in the firm, the economic profit of the firm would be 450,000 – 100,000 - 112,500 (i.e. 15% of $750,000) = $237,500 The implicit costs are 10% of $750,000 = $75,000 The firm's accounting profit is 450,000 – 100,000 = $350,000. The firm earns an economic profit of 450,000 – 100,000 – 75,000 = $275,000 Total economic cost is 100,000 + 75,000 = $175,000