Gomez runs a small pottery firm. He hires one helper at $13,000 per year, pays annual rent of $5,500 for his shop, and spends $21,500 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 $5,500 per year if alternatively invested. He has been offered $19,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $2,500 per year. Total annual revenue from pottery sales is $75,000.

Question

Calculate the accounting profit and the economic profit for Gomez's pottery firm.

Explanation:

Gomez's run a small poetry firm

1. He Hired one helper and pay him $13,000 per year

2. He pays an annual rent $5,500 for his shop

3. He pays $21,500 on materials per year.

Then, his total explicit costs is

$13,000 + $5,500 + $21,500

Explicit costs: $40,000

He has is $40,000 of his own fun invested in equipment which could have earn him $5,500 per year if alternatively invested. Then,

Foregone interest: $5,500

He has been offered $19,000 job to work as a Potter for competition

Foregone salary: $19,000

Entrepreneurial talents worth $2,500 per year

Normal profit: $2,500

The implicit cost is $5,500 + $19,000 + $2,500

Implicit cost: $27,000

Total annual revenue from pottery sales is $75,000.

Total revenue: $75,000

Then, the Accounting profit is the explicit costs subtracted from total annual profit

Accounting profit = $75,000 -$40,000

Accounting profit = $35,000

Economic profit is explicit cost subtracted from the accounting profit

Economic profit= $35,000 -$27,000

Economic profit = $8,000