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# Answer to Question #23851 in Microeconomics for Abdiasiis Mohamed

Question #23851
Question 1
Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a
current market value of $4 million. Bowen owes his local bank$3 million. Last year,
Bowen sold $5 million worth of cotton. His variable operating costs were$4.5 million;
accounting depreciation was $40,000, although the actual decline in value of Bowenâ€™s machinery was$60,000 last year. Bowen paid himself a salary of $50,000, which is not considered part of his variable operating costs. Interest on his bank loan was$400,000.
If Bowen worked for another farmer or a local manufacturer, his annual income would be
about $30,000. Bowen can invest any funds that would be derived, if the farm sold, to earn 10 percent annually. (Ignore taxes.) a. Compute and interpret Bowenâ€™s accounting profits. b. Compute and interpret Bowenâ€™s economic profits. 1 Expert's answer 2013-02-06T11:39:40-0500 The accounting profit is the difference between total revenue and total cost excluding the economic cost (opportunity cost) of owner-supplied resources such as time and capital. On the other hand, In the economic cost, we include the opportunity cost in our calculations. Accounting profit = 5,000,000 - 4,500,000 - 40,000 - 400,000 - 50,000 =$10,000
Economic profit = 5,000,000 - 4,500,000 - 60,000 - 400,000 - 30,000 - 4,000,000*10% = -$390,000 Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a current market value of$4 million. Bowen owes his local bank $3 million. Last year, Bowen sold$5 million worth of cotton. His variable operating costs were $4.5 million; accounting depreciation was$40,000, although the actual decline in value of Bowen&rsquo;s machinery was $60,000 last year. Bowen paid himself a salary of$50,000, which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about$30,000. Bowen can invest any funds that would be derived, if the farm sold, to earn 10 percent annually. (Ignore taxes.)

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