Question

Suppose a farmer in Georgia begins to grow peaches. He uses​ $1,000,000 in savings to purchase​ land, he rents equipment for ​$70 comma 00070,000 a​ year, and he pays workers ​$120 comma 000120,000 in wages. In​ return, he produces 250 comma 000250,000 baskets of peaches per​ year, which sell for ​$3.003.00 each. Suppose the interest rate on savings is 22 percent and that the farmer could otherwise have earned ​$40 comma 00040,000 as a shoe salesman. What is the​ farmer's economic​ profit?

Answer 1

Economic profit = $300,000

Step-by-step explanation:

Economic profit is the difference between the sales revenue and the total of implicit cost and explicit cost

Implicit cost are opportunity costs. For the farmer, these include

Interest on capital forfeited and salaries forfeited

= (22%× 1,000,000) + 40,000

= 260,000

Total cost = Implicit +explicit costs

= 260,000 + 260,000 +70,000 +120,000

Economic profit =750000- (260,000 +70,000 +120,000)

= $300,000

Note that the cost of land is not included because it a capital cost