The table below provides the total revenues and costs for a dental practice for one year.

Total Revenue ($) 950,000

Total Costs ($):
Wages and salaries 700,000
Risk-free return of 3% on owner’s capital of $1,000,000 30,000
Interest on bank loan 50,000
Cost of supplies 150,000
Depreciation of capital equipment 20,000
Additional wages the dentist owner could have
earned in her next best alternative 0 Risk premium of 4% on owner’s capital of $1,000,000 40,000

7.1 Calculate the amount of explicit costs.

7.2 Calculate the amount of implicit costs.

7.3 Calculate the amount of accounting profits.

7.4 Calculate the amount of economic profits.

7.1 92000

7.2 70000

7.3 30000

7.4 -40000

Explanation:

7.1  Explicit cost means the cost which occurs to meet the expenses for the business operations

The explicit cost is calculated below.

Wages and salaries  700000

Interest on bank loan 50000

Cost supplies             150000

Depreciation                20000

Total Explicit cost     $920000

7.2  Implicit cost means the opportunity cost that is foregone by investing in other type of investment. Implicit cost is not incurred by the business actually.

Risk free return     30000

Risk premium        40000

Total Implicit cost $70000

*7.3  The difference between the cost and the revenue provides the accounting profit of the firm.

Accounting Profit

= Revenue - Explicit Cost

=950000 - 920000

Total accounting profit firm= $30000

7.4  Economic profit means the profit arrived by the firm after deducted the total of explicit and implicit cost.

Economic Profit

=Revenue - (Explicit Cost + Implicit Cost)

=950000 - (920000 + 70000)

Total Economic Loss incurred= $-40000

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