Suppose a farmer in Georgia begins to grow peaches. He uses $1,000,000 in savings to purchase land, he rents equipment for $90,000 a year, and he pays workers $150,000 in wages. In return, he produces 200,000 baskets of peaches per year, which sell for $3.00 each. Suppose the interest rate on savings is 5 percent and that the farmer could otherwise have earned $35,000 as a shoe salesman. What is the farmer's economic profit? The peach farmer earns economic profit of

Question

Business

Alfred Madden

11 November, 20:38

Suppose a farmer in Georgia begins to grow peaches. He uses $1,000,000 in savings to purchase land, he rents equipment for $90,000 a year, and he pays workers $150,000 in wages. In return, he produces 200,000 baskets of peaches per year, which sell for $3.00 each. Suppose the interest rate on savings is 5 percent and that the farmer could otherwise have earned $35,000 as a shoe salesman. What is the farmer's economic profit? The peach farmer earns economic profit of

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Miles Cochran · Answer 1

Answer: The farmer's economic profit is $2,75,000.

Explanation:

Cost Incurred for Growing peaches (Explicit Cost):

Rents equipment = $90,000 a year

Paid Wages = $1,50,000

Total Explicit cost = $2,40,000

Total Revenue (TR) Earned:

TR = Number of baskets of peaches produced per year * selling price of each peaches

= 2,00,000 * $3.00

= $6,00,000

Opportunity Cost (Implicit Cost):

Interest rate on savings (5 %) = 5% of $1,000,000

= $50,000

Farmer earn as a shoe salesman = $35,000

Total implicit cost = $85,000

Economic Profit:

Economic Profit = Total Revenue - Implicit cost - Explicit cost

= $6,00,000 - $85000 - $2,40,000

= $2,75,000