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

Question

Gomez runs a small firm which makes pottery. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and materials cost $20,000 per year. Gomez has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) which could earn him $4000 per year if alternatively invested. Gomez has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are work $3000 per year. Total annual revenue from pottery sales is $72,000. Calculate accounting profits and economic profits for Gomez's pottery.

Explanation / Answer

Explicit costs: $12,000 for the helper + $5,000 of rent + $20,000 of materials) = Implicit costs: $4,000 of forgone interest + $15,000 of forgone salary + $3,000 of entrepreneurship = Accounting profit: $72,000 of revenue - $37,000 of explicit costs)= Economic profit $72,000 - $37,000 of explicit costs - $22,000 of implicit costs=

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