Question

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for ​$90,000 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 5 percent and that the farmer could otherwise have earned ​$35,000 as a shoe salesman. What is the​ farmer's economic​ profit? The peach farmer earns economic profit of ​

Answer 1

Answer: The farmer's economic profit is $2,75,000.

Explanation:

Cost Incurred for Growing peaches (Explicit Cost) :

Rents equipment = $90,000 a year

Paid Wages = $1,50,000

Total Explicit cost = $2,40,000

Total Revenue(TR) Earned:

TR = Number of baskets of peaches produced per year × selling price of each peaches

= 2,00,000 × $3.00

= $6,00,000

Opportunity Cost (Implicit Cost):

Interest rate on savings ( 5 %) = 5% of $1,000,000

                                                  = $50,000

Farmer earn as a shoe salesman = $35,000

Total implicit cost = $85,000

Economic Profit:

Economic Profit = Total Revenue - Implicit cost - Explicit cost

                            = $6,00,000 - $85000 - $2,40,000

                            = $2,75,000