Question

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for ​$50 comma 000 a​ year, and he pays workers ​$140 comma 000 in wages. In​ return, he produces 250 comma 000 baskets of peaches per​ year, which sell for ​$3.00 each. Suppose the interest rate on savings is 2 percent and that the farmer could otherwise have earned ​$40 comma 000 as a shoe salesman. What is the​ farmer's economic​ profit? The peach farmer earns economic profit of ​$ nothing.

Answer 1

Answer:

($500,000)

Explanation:

Economic profit = revenue - explicit costs  - implicit costs (opportunity cost)

The revenue is = $3.00 x 250,000 peaches

                         = $750,000

The explicit costs are = land cost + equipment rent + salaries

                                    = $1,000,000 + 50,000 + 140,000

                                    = $1,190,000

The implicit costs are = interest income + earnings as a shoe salesman

                                    = $20,000 + $40,000

                                    = $60,000

Economic profit = $750,000 - $1,190,000 - $60,000

                          = ($500,000)

Thus, the farmers' total economic profit is actually a total economic loss of $500,000