Gomez runs a small pottery firm. He hires one helper at 12,000$ per year, pays a

Question

Gomez runs a small pottery firm. He hires one helper at 12,000$ per year, pays annual rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment that could earn him $4000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3000 per year. Total annual revenue from pottery sales is $72,000. Calculate the accounting profit and the economic profit for Gomez's pottery firm.

Explanation / Answer

3)   When total revenue exceeds both explicit and implicit costs, the firm earns economic profit.

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