19. The data in the table represents annual costs and revenue for Aurora\'s Orch
ID: 1123683 • Letter: 1
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19. The data in the table represents annual costs and revenue for Aurora's Orchid Emporium. Aurora works 60 hours a week at the Orchid Emporium. Aurora owns the building that houses the Orchid Emporium, and if she closed the shop, she could rent out the building for $40,000 per year and go to work for Acme Flowers and earn a salary of $30,000 per year. Calculate the economic profit and economic cost for Aurora's Orchid Emporium. Are these figures the same as the accounting cost and accounting profit? Explain. Wages Paid Interest Paid on Loans Other Expenditures for $22,000 8,000 26,000 Factors of Production Total Revenue 115,000Explanation / Answer
Explicit cost can be defined as the cost which the firm pays to outsiders for their using factors of production.
Implicit cost is an implicit cost which the firm owner has forgone because he has used his own resource in his firm but does not pay anything. It means the implicit cost is an opportunity cost which a firm owner has lost because he is using it in his firm instead of renting it out to others and does not get anything for it.
Implicit cost = Rent forgone due to using his property in his own business of running the shop+ forgone salary by working in his business
=$40,000+$30,000
=$70,000
Explicit cost =wages +interest + other expenses
=22,000 +8000 +26,000
=$56,000
TR=$115,000
Accounting profit = TR- explicit cost
=$115,000 - $56,000
=$59,000
Economic profit/Loss =TR- ( implicit cost +explicit cost)
=$115,000 -( $70,000 + 56,000)
=115,000 - 126,000
=-$11,000
Economic loss =$11,000
No, the figure for the economic profit and accounting profit will be different because economic profit considers both implicit costs as well as explicit cost while accounting profit considers only explicit cost.
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