Gomez runs a small pottery firm. He hires one helper at $11,000 per year, pays annual rent of $6,000 for his shop, and spends $22,000 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 $4,500 per year if alternatively invested. He has been offered $17,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,500 per year. Total annual revenue from pottery sales is $70,000. Calculate the accounting profit and the economic profit for Gomez’s pottery firm.

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ewomazinoade ewomazinoade · Answer 1 · 2021-03-13T01:49:16+01:00

Answer:

$31000

$6000

Explanation:

Accounting profit= total revenue - explicit cost

Explicit cost includes the amount expended in running the business. They include rent , salary and cost of raw materials

explicit cost = $11,000 + $22,000 + $6,000 = $39,000

Accounting profit = $70,000 - $39,000 = $31,000

Economic profit = accounting profit - implicit cost

Implicit cost is the cost of the next best option forgone when one alternative is chosen over other alternatives

It includes the amount he could have earned if he invested is money , his entrepreneur talent and salary he could have earned

$31,000 - $4500 - $17,000 - $3,500 = $6000