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 instead of investing the money and earning a 10% annual rate of return.
What is the explicit opportunity cost of using market-supplied resources?
A. $100,000
B. $750,000
C. $75,000
D. $175,000
Using the same facts as Question 1:
What is the total economic cost?
A. $100,000
B. $750,000
C. $175,000
D. $75,000
Using the same facts as Question 1:
What is the firm's economic profit?
A. $450,000
B. $275,000
C. $300,000
D. $350,000
Using the same facts as Question 1:
What is the firm's accounting profit?
A. $300,000
B. $350,000
C. $275,000
D. $0
Using the same facts as Question 1, except assume the owner could earn 15% annually on the money she has invested in the firm:
What is the economic profit of the firm? (When revenue is $450,000)
A. $0
B. $350,000
C. $237,500
D. $75,000
a, a, a, a, a
b, b, b, b, b
C,C,C,C,C
A, A, A, A, A
a,c,b,d,
To answer these questions, we need to understand the concepts of explicit opportunity cost, total economic cost, economic profit, and accounting profit.
1. The explicit opportunity cost of using market-supplied resources is the amount of money that could have been earned by investing the owner's money instead of using it in the firm. In this case, the owner has provided $750,000, which could have earned a 10% annual rate of return. Therefore, the explicit opportunity cost is $750,000 * 10% = $75,000. The answer is C. $75,000.
2. Total economic cost includes both explicit costs (such as labor expense, raw materials, rent, and utilities) and implicit costs (such as the opportunity cost of using the owner's money). In this case, the explicit cost is $100,000, and the implicit cost is $75,000 (as calculated above). Therefore, the total economic cost is $100,000 + $75,000 = $175,000. The answer is C. $175,000.
3. Economic profit is the difference between total revenue and total economic cost. In this case, the total revenue is $450,000, and the total economic cost is $175,000 (as calculated above). Therefore, the economic profit is $450,000 - $175,000 = $275,000. The answer is B. $275,000.
4. Accounting profit is the difference between total revenue and explicit costs. In this case, the total revenue is $450,000, and the explicit cost is $100,000. Therefore, the accounting profit is $450,000 - $100,000 = $350,000. The answer is B. $350,000.
5. To calculate the economic profit when the owner could earn 15% annually on the money invested in the firm, we need to consider the new opportunity cost. In this case, the owner could earn 15% annually on the $750,000 invested, which is $750,000 * 15% = $112,500.
The economic profit would be the total revenue ($450,000) minus the total economic cost, which includes the explicit cost ($100,000) and the new opportunity cost ($112,500).
Therefore, the economic profit is $450,000 - $100,000 - $112,500 = $237,500. The answer is C. $237,500.