1. 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

2. 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

3. 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