Answer to Question #110902 in Microeconomics for Someswari A/P S. T. Rajan

Question

Suppose that a firm produces 200,000 units a year and sells them all for RM10 each.
The explicit costs of production are RM1, 500,000 and the implicit costs of production
are RM300, 000. Calculate the firm’s accounting profit and economic profit

Answer 1

The accounting profit of the firm is estimated as follows:

Accounting profit=Total revenue-Explicit cost.

The total revenue is the product of the price per unit and the quantity sold. (Price* Quantity)

Total revenue=200,000*RM10

Total revenue=RM2,000,000

Therefore, substituting the figures given in the above formula we get:

Accounting profit=RM2,000,000-RM1, 500,000

Accounting profit=RM500,000.

On the other hand, the economic profit of the firm is computed as follow:

Economic profit=Total revenue-Explicit cost-Implicit cost

Economic profit=RM2,000,000-RM1, 500,000-RM300, 000

Economic profit=RM200,000.

Therefore, the accounting profit is RM500,000 and an economic profit of RM200,000.