Gomez runs a small pottery firm. He hires one helper at $16,500 per year, pays a

Question

Gomez runs a small pottery firm. He hires one helper at $16,500 per year, pays annual rent of $6,000 for his shop, and spends $22,500 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 $19,500 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $5,500 per year. Total annual revenue from pottery sales is $89,000. Calculate the accounting profit and the economic profit for Gomezs pottery firm.

Accounting profit = ?

Economic profit = ?

Explanation / Answer

Explicit costs = $16,500 for the helper

+ $6,000 of rent

+ $22,500 of materials

So, Explicit costs = $45,000

Implicit costs = $5,000 of forgone interest

+ $19,500 of forgone salary

+ $5,500 of entrepreneurship

Implicit costs = $30,000

Revenue = $89,000

Accounting profit = revenue -explicit costs = $89,000 -$45,000 = $44,000  

Economic profit = Revenue -explicit costs - implicit costs= $89,000 - $44,000 -$30,000 = $14,000

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