Suppose a firm has an annual budget of $200,000 in wages and salaries,$75,000 in materials,$30,000 in new equipment,$20,000 in rented property,and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself,but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year.What is the economic profit for the firm described above?
A)-$90,000.
B)$0.
C)$90,000.
D)$200,000.

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting all explicit and implicit costs from revenues. In this case, the explicit costs are $340,000 ($200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, and $20,000 in rented property), and the implicit cost is the owner/manager's potential income of $90,000. The total costs are therefore $430,000 ($340,000 + $90,000). The revenues are $360,000. So the economic profit is -$70,000 ($360,000 - $430,000). Option A is the correct choice since it represents a negative economic profit.

Suppose a Firm Has an Annual Budget of $200,000 in Wages