During 2013, Betsy’s engineering firm collected $450,000 in revenue and spent $1

Question

During 2013, Betsy’s engineering firm collected $450,000 in revenue and spent $100,000 on labor expense, raw materials, rent, and utilities. In addition, the firm paid taxes of $20,000 and incurred attorney fees of $30,000 for environmental disputes. The firm’s owner, Betsy, has provided $750,000 of her own money instead of investing the money and earning a 10% annual rate of return. Betsy has a degree in engineering and could be earning $80,000 annually working for one of her competitors.

a. What are the explicit costs of market-supplied resources?

b. What are the implicit costs of owner-supplied resources?

c. What is total economic cost?

d. What is the firm’s accounting profit?

e. What is the firm’s economic profit?

f. Should Betsy continue running her firm or should she go work for one of her competitors?

Explanation / Answer

a. Explicit costs = $100,000 + $20,000 + $30,000 = $150,000

b. Implicit cost = 10% of $750,000 + $80,000 = $155,000

c. Total economic cost = Explicit costs + Implicit cost = $150,000 + $155,000 = $305,000

d. firm’s accounting profit = Revenue - Explicit costs = $450,000 = $$150,000 = $300,000

e. firm’s economic profit = Revenue - Total economic cost = $450,000 = $$305,000 = $145,000

f. Betsy should close the and go work for one of her competitors. Because the economic profit of $145,000 is less than the opportunity cost of $155,000.

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