Answer on Economics of Enterprise Question for HELAL
a. Compute and interpret Bowen’s accounting profits.
b. Compute and interpret Bowen’s economic profits.
Last year sold $5 million worth of cotton
variable operating costs = $4.5 million;
accounting depreciation = $40,000,
actual decline in value = $60,000
salary = $50,000,
Interest on loan = $400,000
income would be - $30,000.
Bowen can invest any funds that would be derived, if the farm sold, to earn 10 percent annually.
a.Accounting profit consists of revenue minus explicit costs.
Bowen’s accounting profits = Total revenue - Explicit cost = 5,000,000 - (4,500,000 + 40,000 + 50,000 + 400,000) = $10,000
b.Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs.
Bowen’s economic profits = Accounting profit - Implicit cost = 10,000 - (4,000,000*0.1 + 30,000 + (60,000 - 40,000)) = -$440,000
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