During a year of operation, a firm collects $ 175,000 in revenue and spends $ 80,000 on

raw materials, labor expense, utilities, and rent. The owners of the firm have provided $
500,000 of their own money to the firm instead of investing the money and earning a 14
percent annual rate of return.
a. The explicit costs of the firm are $______ . The implicit costs are $ . Total economic
cost is $_____ .

Explicit costs = $80,000

Implicit costs = $500,000 X 0.14= $70,000 (opp. costs of capital)
Total Economic cost = Explicit cost + Implicit cost = $80,000+$70,000 = $150,000.

b. The firm earns economic profit of $_____ .

Economic profit = Total Revenue Total Economic Cost = $175,000 $150,000 = $25,000.

c. The firms accounting profit is $_______.

Accounting Profit = Total Revenue Explicit Cost (Accounting Cost)

= $175,000 $80,000 = $95,000.

d. If the owners could earn 20 percent annually on the money they have invested in
the firm, the economic profit of the firm would be ________ (when revenue is $
175,000).

Implicit costs = $500,000 X 0.2 = $100,000.

Economic Cost = $80,000+$100,000 = $180,000.
Economic Profit = $175,000 $180,000 = $5,000.