Question

Suppose that a sole proprietorship is earning total revenue of 1000000 and is incurring explicit costs of 750000. The owner could work for another company for 300000 a year.

a. what will be the implicit cost of the firm?

b. The above mentioned firm is earning how much?​

Answer 1

Explanation:

Economic profit is calculated as the difference between total revenue and total cost ( including the implicit costs).

In the given situation, the total cost to the proprietor would be the explicit cost plus the opportunity cost of what he could have earned if he could have worked in a company.

Economic Profit = Total Revenue - Total Cost (Explicit Cost + Implicit Cost)

Economic Profit = 1,00,000 - (75,000 + 30,000)

= - 5000

Thus, the proprietor is earning an economic loss. However, it must be noted that he is earning a profit in accounting sense.