3. Suppose that a business incurred implicit costs of $500,000 and explicit costs of $6 million in a specific year. If the firm sold 100,000 units of its output at $60 per unit, its accounting:
A) profits were $100,000 and its economic profits were zero.
B) losses were $500,000 and its economic losses were zero.
C) profits were $500,000 and its economic profits were $1 million.
D) profits were zero and its economic losses were $500,000.
To calculate the accounting profits, we need to subtract the explicit costs from the total revenue. The explicit costs in this scenario are $6 million and the total revenue can be calculated by multiplying the number of units sold (100,000) by the selling price per unit ($60).
Total revenue = 100,000 units * $60 per unit = $6 million
Accounting profits = Total revenue - Explicit costs
= $6 million - $6 million
= $0
Now let's understand the concept of economic profits. Economic profits take into account both explicit costs and implicit costs. Implicit costs refer to the opportunity cost of using the firm's resources for a particular purpose instead of using them in the best alternative use. In this case, the implicit costs are given as $500,000.
To calculate economic profits, we subtract the sum of explicit costs and implicit costs from the total revenue.
Economic profits = Total revenue - (Explicit costs + Implicit costs)
= $6 million - ($6 million + $500,000)
= $6 million - $6.5 million
= -$500,000 (Losses)
Therefore, the correct answer is option D) Profits were zero and economic losses were $500,000.