Question

Calculate the accounting
profit or loss as well as the economic profit or loss in each of the
following situations:
a. A firm with total revenues of $150 million, explicit costs of
$90 million, and implicit costs of $40 million
b. A firm with total revenues of $125 million, explicit costs of
$100 million, and implicit costs of $30 million
c. A firm with total revenues of $100 million, explicit costs of
$90 million, and implicit costs of $20 million
d. A firm with total revenues of $250,000, explicit costs of
$275,000, and implicit costs of $50,000

Answer 1

Answer:

(a) $60; $20 million

(b) $25; -$5 million

(c) $10; -$10 million

(d) -$25; -$75 million

Explanation:

(a)

Accounting Profit = Total revenues - Explicit cost

                              = $150 - $90

                              = $60 million

Economic Profit = Accounting Profit - Implicit cost

                           = $150 - $90 - $40

                           = $20 million

(b)

Accounting Profit = Total revenues - Explicit cost

                             = $125 - $100

                             = $25 million

Economic Profit = Accounting Profit - Implicit cost

                           = $125 - $100 - $30

                           = -$5 million (that's a negative $5 million)

(c)

Accounting Profit  = Total revenues - Explicit cost

                              = $100 - $90

                              = $10 million

Economic Profit = Accounting Profit - Implicit cost

                           = $100 - $90 - $20

                           = -$10 million (negative $10 million)

(d)

Accounting Profit = Total revenues - Explicit cost

                             = $250 - $275

                             = -$25 million (negative $25 million)

Economic Profit = Accounting Profit - Implicit cost

                           = $250 - $275 - $50

                           = -$75 million (negative $75 million)