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Accounting and economic profit

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Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4000per year if alternatively invested. He has offered $15000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3000 per year. Total annual revenue from pottery sales is $ 72,000. Calculate the accounting profit and the economic profit for Gomez pottery firm.

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Solution Summary

Calculation of accounting and economic profits for a pottery firm are provided.

Solution Preview

Explicit costs: $37,000 (= $12,000 for the helper + $5,000 of rent + $20,000 of materials). ...

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