Answer to Question #158489 in Microeconomics for nfraser

Question

1.      (a) Assume that although Marrow firm is presently making accounting profit but experiencing negative economic profit in its current venture. The owner of the firm does not understand what this means and asks you to explain to him. 

(b) Study the table below

Revenue $50000

Labour $5000

Equipment Rental $6000

Rent $7000

Insurance $3500

Advertising $2500

Wages of other jobs foregone $20,000

(i)                 Calculate the accounting profit

               Total revenue – explicit cost

(ii)               Calculate the economic profit

               Total revenue – (explicit cost + implicit cost)

Answer 1

(a) Because when we calculating economic profit we subtracts from the total revenue explicit costs and implicit costs. The last one includes the opportunity costs – the potential benefits foregone when an option is not chosen. Since the opportunity costs do not include in the accounting profit Marrow firm is presently making accounting profit. But the economic profit is negative. The economic profit used to best assist management with decision-making. Therefore, the owner and the management of the firm can analyze the previous decisions and increase the accounting profit of the firm in the future.

(b)

(i) Accounting profit can be calculated as follows:

Total revenue-explicit cost=Total revenue-Labour-Rent-Equipment Rental-Advertising-Insurance=

$50000-$5000-$7000-$6000-$2500-$3500=$26000.

(ii) Economic profit can be calculated as follows:

Total revenue–(explicit cost + implicit cost)=Total revenue-(Labour+Rent+Equipment Rental+Advertising+Insurance+Wages of other jobs foregone)=$50000-($26000+$20000)=$4000.