1. Read the following business information and answer the questions given: a) Ca
ID: 1193888 • Letter: 1
Question
1. Read the following business information and answer the questions given:
a) Calculate accounting costs.
b) If the entrepreneur is able to earn $1000 as employee elsewhere. What is the economic profit?
c) If the entrepreneur is able to earn $1000 as employee elsewhere. What is the accounting profit?
Assume an apple farmer incurs the following costs and revenues Fertilizer Seeds Water Wages: Property taxes Interest payments on borrowed funds Sales of apples: $200 $75 $250 $750 $600 $1,200 $4.000Explanation / Answer
(a) Accounting costs are the costs that an entrepreneur paid to ousiders for availing services from them or for purchase of raw material from them to undertake production process.
In given case,
Accounting costs = Cost of Fertilizer + Cost of Seeds + Cost of Water + Wages paid + Property taxes paid + Interest paid on borrowed funds
Accounting costs = $200 + $75 + $250 + $750 + $600 + $1,200
= $3,075
The accounting costs is $3,075.
(b) It has been provided that entrepreneur is able to earn $1,000 as employee elsewhere. This is the imputed cost of farmer's labor that is if he is working somewhere else rather than running his apple farm, he would be earning $1,000. Imputed costs are referred to as implicit cost.
Thus, implicit cost in this case is $1,000.
Accounting costs are also termed as explicit costs.
Calculate Economic Profit -
Total revenue = $4,000
Explicit cost = $3,075
Implicit cost = $1,000
Economic profit = Total revenue - (Explicit cost + Implicit cost)
= $4,000 - ($3,075 + $1,000)
= $4,000 - $4,075
= -$75
Negative economic profit implies that apple farmer is making a economic loss of $75.
(c) It has been provided that entrepreneur is able to earn $1,000 as employee elsewhere. This is the imputed cost of farmer's labor that is if he is working somewhere else rather than running his own apple farm, he would be earning $1,000. Imputed costs are referred to as implicit cost.
Thus, implicit cost in this case is $1,000.
Implicit cost is not taken into the calculation of accounting profit.
Calculate accounting profit -
Accounting profit = Total revenue - Accounting cost
= $4,000 - $3,075
= $925
The accounting profit is $925.
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