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Calculating Economic and Accounting Profit
A small bakery generates $80,000 in annual revenue. The explicit costs for ingredients, rent, and utilities total $50,000. The owner, who works full-time as the baker, could have earned a $40,000 salary working elsewhere. The owner also invested $20,000 of their own savings, which could have earned a 5% return ($1,000). The accounting profit is calculated as Total Revenue - Explicit Costs, which is $80,000 - $50,000 = $30,000. The economic profit is Total Revenue - (Explicit Costs + Implicit Costs), which is $80,000 - ($50,000 + $40,000 + $1,000) = -$11,000. This scenario illustrates how a business can show a positive accounting profit while having a negative economic profit.
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Economics
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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A company generates $500,000 in total revenue for the year. An accountant calculates the company's profit as $200,000. However, an economist calculates the profit as $120,000 for the same period. Based on this information, what is the value of the company's implicit costs?
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Calculating Economic and Accounting Profit
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A key difference between two measures of a firm's performance is that one subtracts only explicit, out-of-pocket expenses from total revenue, while the other also subtracts ____ costs, which represent the value of foregone opportunities.
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Learn After
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Consulting Firm Profit Calculation
A small retail shop owner generates $150,000 in annual revenue. The owner pays $20,000 in rent, $60,000 for inventory, and $30,000 in wages to an employee. The owner could have earned a salary of $50,000 working for another company. Based on this information, the statement 'The shop is earning a positive economic profit' is true.
A software developer starts a new app business. In the first year, the business generates $120,000 in revenue from app sales. The developer spends $15,000 on server hosting and $5,000 on marketing. To start the business, the developer quit a job that paid $90,000 per year and used $40,000 of personal savings, which could have earned a 5% annual return. Based on this scenario, match each economic term with its correct calculated value.
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A coffee shop has total revenues of $200,000 and explicit costs of $140,000. The owner's foregone salary is the only implicit cost, valued at $55,000. In this case, the business's economic profit is $____ less than its accounting profit.
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Consulting Firm Profit Calculation
A small retail shop owner generates $150,000 in annual revenue. The owner pays $20,000 in rent, $60,000 for inventory, and $30,000 in wages to an employee. The owner could have earned a salary of $50,000 working for another company. Based on this information, the statement 'The shop is earning a positive economic profit' is true.