Answer to Question #107438 in Microeconomics for Hiba

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.



Instructions: Enter your answers as whole numbers.



a. Calculate the accounting profit for Gomez’s pottery firm. $
.



b. Now calculate Gomez's economic profit. $
.

Answer 1

a. Calculate the accounting profit for Gomez’s pottery firm. $ 37,000 

$ 37,000 = 71,000 - ($10,500 for the helper + $4,500 for rent + $19,000 for materials)

b. Now calculate Gomez's economic profit. $ 8,000 

$ 8,000 = 37,000 - ($5,000 of forgone interest + $21,000 of forgone salary + $3,000 of entrepreneurship)