Question

Alicia owns a small pottery factory. She can make 1000 pots per year and sell them for $100 each. It costs Alicia $20,000 for the raw materials to produce the 1000 pots. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10%. Alicia can work at a competing pottery factory for $40,000/year. What is the accounting profit at Alicia's factory?

Answer 1

The firm's accounting profit is $50,000 when the total revenues are $1 million and the explicit costs are $600,000 for labor, $150,000 for capital, and $200,000 for materials.

Step-by-step explanation:

To calculate the accounting profit of the firm, we need to subtract the explicit costs from the total revenues. In this case, the firm's total revenues are $1 million, and the explicit costs are $600,000 for labor, $150,000 for capital, and $200,000 for materials. So the accounting profit is:

Accounting profit = Total revenues - Explicit costs = $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000.

Therefore, the firm's accounting profit is $50,000.

Answer 2

$-20,000

Step-by-step explanation:

Accounting profit = total revenue - total explicit cost

Total revenue = price x quantity produced

$100 x 1000 = $100,000

Total explicit cost = fixed cost + variable cost

Fixed costs are costs that do not vary with output. e,g amount invested in the factory

Variable costs are costs that vary with production. e.g. cost of raw materials

$100,000 + $20,000 = $120,000

Accounting profit = $100,000 - $120,000 = $-20,000