Gomez runs a small pottery firm. He hires one helper at $15,000 per year, pays a

Question

Gomez runs a small pottery firm. He hires one helper at $15,000 per year, pays annual rent of $6,500 for his shop, and spends $23,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $6,000 per year if alternatively invested. He has been offered $20,500 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $5,000 per year (input cost for organizing resources). Total annual revenue from pottery sales is $82,000. Calculate the accounting profit and the economic profit for Gomez’s pottery firm. Accounting profit = $ Economic profit = $

Explanation / Answer

Accounting cost includes all cost that are actually paid (explicit cost) whereas economic cost includes both explicit cost and implicit cost( cost of owner inputs)

Accounting profit = revenue - accounting cost = 82000- 15000- 6500-23000= 37500

Economic profit= revenue- economic costs=82000- 15000- 6500-23000-6000-20500-5000= 6000

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