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 comma 000 a​ year, and he pays workers ​$110 comma 000 in wages. In​ return, he produces 300 comma 000 baskets of peaches per​ year, which sell for ​$3.00 each. Suppose the interest rate on savings is 1 percent and that the farmer could otherwise have earned ​$45 comma 000 as a shoe salesman. What is the​ farmer's economic​ profit? The peach farmer earns economic profit of ​$nothing . ​(Enter your response as an​ integer.)

Answer 1

Economic profit =$645,000

Step-by-step explanation:

Economic profit is the difference between revenue and out of pocket expenses plus opportunity cost.

Opportunity cost is the value of the benefit sacrificed in favour of a decision. It is the value of the next best alternative forgone in favour of a decision.

For example, the opportunity cost of the farmer is the interest rate he would have earned had he invested the money in savings account plus the salary forgone as a salesman

Economic profit = Revenue - out-of-pocket expenses - opportunity cost

Opportunity cost = interest foregone + salary forgone

= (1% × $1,000,000) + 45,000 = 55,000

Out of pocked trading expenses = 110,000 + 90,000 = $200,000

Revenue = $3 × 300,000 = $900,000

Economic profit = 900,000 -200,000-55,000= $645,000

Economic profit =$645,000