The table below provides the total revenues and costs for a small landscaping company in a recent year. $\begin{array}{|l|l|}
\hline \text { Total Revenues }(\$) & 250,000 \
\hline & \
\hline \text { Total Costs }(\$) & \
\hline \text { - wages and salaries } & 150,000 \\hline \text { risk- free return of } 2 \% \text { on owner's capital of } \$ 20 & 400 \000\\hline \text { interest on bank loan } & 1500 \
\hline \text { cost of supplies } & 27000 \
\hline \text { depreciation of capital equipment } & 8000 \
\hline \text { additional wages the ow ner could have earned } & 30000 \\text {in next best alternative }\
\hline \text {- risk premium of } 4 \% \text { on owner's capital of } \$ 20&800\000\\hline
\end{array}$
$\text { TABLE 7- } 2$
-Refer to Table 7- 2. The economic profits for this firm are
A) $31 200.
B) $63 500.
C) $32 700.
D) $33 500.
E) $32 300.

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Explicit costs are $187,500 (wages $150,000 + interest $1,500 + supplies $27,000 + depreciation $8,000). Implicit costs include the opportunity cost of the owner's time ($30,000) and the risk-free return ($400) plus risk premium ($800) on owner's capital. Total costs are $217,700. Economic profit = $250,000 - $217,700 = $32,300.

The Table Below Provides the Total Revenues and Costs for a Small