Question

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for ​$60,000 a​ year, and he pays workers ​$130,000 in wages. In​ return, he produces 150 comma 000 baskets of peaches per​ year, which sell for ​$4.00 each. Suppose the interest rate on savings is 2 percent and that the farmer could otherwise have earned ​$40,000 as a shoe salesman. What is the​ farmer's economic​ profit?

Answer 1

Answer:

$350,000

Explanation:

The economic is the profit that also takes into account the opportunity costs, which are the savings and earning that could be made by opting the next best alternative. In this case the opportunity costs are the savings the farmer would earn on $1,000,000 @ 2% and the amount he can make as a shoe salesman.

Economic profit = Revenue - Costs - Opportunity costs

Assuming 150,000 baskets of peaches @ $4.00 each

Opportunity cost of savings = 1,000,000*0.02 = $20,000

Opportunity cost of shoe salesman = $40,000

Economic profit = (150,000*4) - (60,000 + 130,000) - (20,000 + 40,000)

Economic profit = $350,000

Hope that helps.