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ECON205 - Homework06 - S09

# ECON205 - Homework06 - S09 - ~ Account;n ve,us econom;c p.t...

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~. Account;n. ve",us econom;c p•.••• t I1:l During a particular year, a marketing firm has the following costs: \$600,000 in wages and salaries paid to employees; \$75,000 in rental payments for office space; and \$22,000 for office supplies, advertising, and utilities. In addition, Marissa, the owner of the firm, works for the firm full time (and is not paid a salary, since she gets the firm's profit). If she did not work for the marketing firm, Marissa could earn \$120,000 per year working as a marketing manager for another firm. For each possible amount of total revenue, fill in the accounting profit and economic profit of the marketing firm.

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Explanation: Total Revenue Accounting Profit Economic Profit \$700,000 \$3,000 -\$117,000 " \$750,000 \$53,000 -\$67,000 " - - - \$800,000 \$103,000 -\$17,000 " - \$850,000 \$153,000 \$33,000 " Close A Accounting profit is total revenue minus all explicit costs-costs for which money is actually paid out. For this marketing firm, the only explicit costs are wages and salaries paid out (\$600,000); rental payments (\$75,000); and the payments for office supplies, advertising, and utilities (\$22,000). Summing, we get total explicit costs equal to: Total Explicit Costs Wages and Salaries + Rental Payments + Payments for Office Supplies \$600,000 per year + \$75,000 per year + \$22;000 per year \$697,000 per year Subtracting these explicit costs from total revenue gives us the accounting profit for the year; for example: Accounting Profit When Total Revenue Is \$700,000 Total Revenue - Total Explicit Costs \$700,000 per year - \$697,000 per year \$3,000 per year Economic profit for the year is total revenue minus total cost. By total cost, we mean all costs of production, including both explicit costs (for which money is actually paid out) and implicit costs (for which there are no payments, but something of value is nonetheless sacrificed). For this marketing firm, the explicit costs are wages and salaries paid out (\$600,000); rental payments (\$75,000); and the payments for office supplies, advertising, and utilities (\$22,000). The implicit cost is the \$120,000 Marissa could be earning as a marketing manager if she did not work in her own firm. Thus, total cost is: Total Cost Total Explicit Costs + Total Implicit Costs (\$600,000 per year + \$75,000 per year + \$22,000 per year) + \$120,000 \$817,000 per year Subtracting total cost from total revenue yields economic profit for the year: Economic Profit When Total Revenue Is \$700,000 Total Revenue - Total Cost \$700,000 per year - \$817,000 per year -\$117,000 per year Similar calculations can be performed to fill in the remainder of the following, yielding the following results: Total Revenue \$700,000 \$750,000 \$800,000 \$850,000 Accounting Profit \$3,000 \$53,000 \$103,000 \$153,000 Economic Profit -\$117,000 -\$67,000 -\$17,000 \$33,000 Scores: ,,-- Average: 4/4
2. Profit versus total revenue A firm has total revenue (TR) and total cost (TC) curves as shown on the diagram below. To complete the graph, you

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ECON205 - Homework06 - S09 - ~ Account;n ve,us econom;c p.t...

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