Question

Bessie wants to calculate the accounting and economic profits of her cattle farm in Nebraska. She pays $30,000 per year in overhead, $80,000 in wages, and $20,000 in insurance. She forgoes $30,000 per year that she could make as a teacher. If her total revenue equals $140,000, that means her accounting profit is _____ and her economic profit is _____.

Answer 1

Answer:

(i) $10,000

(ii) (-$20,000)

Explanation:

Revenue = $140,000

Explicit cost includes:

Overhead paid = $30,000

Wages paid = $80,000

Insurance paid = $20,000

Implicit cost includes:

Earning as a teacher = $30,000

Accounting profit = Revenue - Explicit cost

= 140,000 - (30,000 + 80,000 + 20,000 )

= $10,000

Economic profit = Accounting profit - Implicit cost

= 10,000 - 30,000

= (-$20,000)