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Chapter 8 The Costs of Production

# Chapter 8 The Costs of Production - Chapter 8 The Costs of...

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Chapter 8 - The Costs of Production Accounting and Economic Profit 1. Suppose that a business incurred implicit costs of \$200,000 and explicit costs of \$1 million in a specific year. If the firm sold 4,000 units of its output at \$300 per unit, its accounting profits were: Answer: \$200,000. Accounting profits are independent of economic profits. The firm’s total revenue was 4000*300 = \$1,200,000. Take the total revenue and subtract the explicit costs of \$1 million and you have \$200,000. If I were to ask you about economic profit, the answer would be \$0, as you include implicit costs into your calculations of total costs. Entrepreneur's potential earnings as a salaried worker = \$50,000 Forgone rent on building = \$1,200 Annual revenue from operations = \$105,000 Payments to workers = \$30,000 Utilities (electricity, water, disposal) costs = \$20,000 Entrepreneur's forgone interest on personal funds used to finance the business = \$1,000 2. Using the above table calculate the firm’s explicit costs, accounting, economic and normal profits. Answer: \$50,000; \$55,000; \$2,800; \$52,200. Explicit costs include the payment to workers and utilities. Accounting profit is total revenue – explicit costs = 105,000 – 50,000 = 55,000 Economic profit is total revenue – total costs = 105,000 – (50,000 + 50,000 + 1,200 + 1,000) = 2,800 Normal profit is Accounting profit – Economic profit =55,000 – 2,800 = 52,200. Normal profit is

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Chapter 8 The Costs of Production - Chapter 8 The Costs of...

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