Question

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for ​$80,000 a​ year, and he pays workers ​$150,000 in wages. In​ return, he produces 200,000 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 ​$45,000 as a shoe salesman.
(a)- The peach farmer earns economic profit of ​$ ?
(b)- The peach farmer earns accounting profit of ​$?

Answer 1

Answer:

a) $305,000

b) $370,000

Explanation:

Given:

cost of land purchased = $1,000,000

Rent on equipment = $80,000

Wages paid = $150,000

Number of baskets produced = 200,000

Selling cost of basket = $3.00 each

Interest rate on savings = 2%

Earning as a shoe salesman = $45,000

Now,

Total revenue = Number of baskets produced × Selling cost of basket

= 200,000 × $3

= $600,000

Explicit cost = Rent on equipment + Wages paid

= $80,000 + $150,000

= $230,000

Implicit cost = Interest on amount spent to buy land + Earning as a shoe salesman

= 2% of $1,000,000 + $45,000

= $20,000 + $45,000

= $65,000

Therefore,

The total cost involved = Explicit cost + Implicit cost

= $230,000 + $65,000

=  $295,000

a) The peach farmer earns economic profit = Total revenue - Total cost

= $600,000 - $295,000

= $305,000

b) The peach farmer earns accounting profit = Total revenue - Explicit cost

=  $600,000 - $230,000

= $370,000