Question

Gomez runs a small pottery firm. he hires one helper at $15,000 per year, pays annual rent of $6,500 for his shop, and spends $23,000 per year on materials. he has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $6,000 per year if alternatively invested. he has been offered $20,500 per year to work as a potter for a competitor. he estimates his entrepreneurial talents are worth $5,000 per year (input cost for organizing resources). total annual revenue from pottery sales is $82,000. calculate the accounting profit and the economic profit for gomez's pottery firm.

Answer 1

$15,000+$6,500+$23,000+$20,500+$5,000=$70,000
$70,000+$40,000=$110,000
$110,000-$82,000=-$28,000
economic profit is -$28,000
$82,000-$70,000=$12,000
accounting profit is $12,000