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7 January, 19:20

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. To receive a normal profit, the firm described above would have to

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  1. 7 January, 19:27
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    The firm will need additional revenue of $90,000 to earn normal profit (zero economic profit)

    Explanation:

    Normal profit equals zero economic profit or when total revenue equals

    the addition of explicit cost and Implicit cost. Implicit cost is the opportunity cost.

    Explicit cost = $200,000 + $75,000 + $30,000 + $20,000 + $35,000

    =$360,000

    Implicit cost is $90,000

    Total revenue is $360,000

    Normal profit = $360,000 - ($360,000 + $90,000)

    $360,000 - $450,000

    -$90,000.

    This means the firm will need additional revenue of $90,000 to earn normal profit (zero economic profit)
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