Managerial Economics: Economic Profit

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Presentation transcript:

Managerial Economics: Economic Profit During a year of operation, a firm collects $ 175,000 in revenue and spends $ 80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $ 500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. a. The explicit costs of the firm are $______ . The implicit costs are $ . Total economic cost is $_____ . b. The firm earns economic profit of $_______ . c. The firm’s accounting profit is $_______ . d. If the owners could earn 20 percent annually on the money they have invested in the firm, the economic profit of the firm would be ________( when revenue is $ 175,000). Dr. C. Chen

Managerial Economics: Economic Profit During a year of operation, a firm collects $ 175,000 in revenue and spends $ 80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $ 500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. The explicit costs of the firm are $______ . The implicit costs are $ . Total economic cost is $_____ . Explicit costs = $80,000 Implicit costs = $500,000 X 0.14= $70,000 (opp. costs of capital) Total Economic cost = Explicit cost + Implicit cost = $80,000+$70,000 = $150,000. b. The firm earns economic profit of $_____ . Economic profit = Total Revenue − Total Economic Cost = $175,000 − $150,000 = $25,000. Dr. C. Chen

Managerial Economics: Economic Profit During a year of operation, a firm collects $ 175,000 in revenue and spends $ 80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided $ 500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. c. The firm’s accounting profit is $_______. Accounting Profit = Total Revenue − Explicit Cost (Accounting Cost) = $175,000 − $80,000 = $95,000. d. If the owners could earn 20 percent annually on the money they have invested in the firm, the economic profit of the firm would be ________ (when revenue is $ 175,000). Implicit costs = $500,000 X 0.2 = $100,000. Economic Cost = $80,000+$100,000 = $180,000. Economic Profit = $175,000 − $180,000 = − $5,000. Dr. C. Chen