Gomez runs a small pottery firm. He hires one helper at $10, 500 per year, pays
ID: 2494896 • Letter: G
Question
Gomez runs a small pottery firm. He hires one helper at $10, 500 per year, pays annual rent of $4, 500 for his shop, and spends $19, 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 $5, 000 per year if alternatively invested. He has been offered $21, 000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3, 000 per year. Total annual revenue from pottery sales is $71, 000. a. Calculate the accounting profit for Gomez's pottery firm. $. b. Now calculate Gomez's economic profit. $.Explanation / Answer
(a) Calculate Accounting profit -
Accounting profit = Total revenue - Explicit cost
AP = TR - (Salary of helper + Annual rent + coost of material)
AP = $71,000 - ($10,500 + $4,500 + $19,000)
AP = $71,000 - $34,000
AP = $37,000
The accounting profit for Gomez's pottery firm is $37,000.
(b) Calculate Economic profit -
Economic profit = Total revenue - Explicit cost - Implicit cost
EP = TR - Explicit cost - (Implied return on funds invested in business + Implied salary + Value of entrepreneurial talent)
EP = $71,000 - $34,000 - ($5,000 + $21,000 + $3,000)
EP = $71,000 - $34,000 - $29,000
EP = $8,000
The economic profit of Gomez's pottery firm is $8,000.
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