Microeconomics math problem help?

[spurs_2108]

Gomez runs a small firm that makes pottery. He hires on helper at $12,000 per yer, pays annual rent of $5,000 for his shop, and materials cost $20,000 per yer. Gomez has $40,000 of his own funds invested in equipment(pottery wheels, kilns, and so forth), which could earn him $4,00 per year if alternatively invested. Gomez has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents to be worth $3,000 per year. His total annual revenue from pottery sales is $102,000. Calculate (a) accounting profit; (b) economic profit; and (c) normal profits for Gomez's pottery firm.

Anyone know the answers to this question. Its confusing.

So far for accounting profit I thought It would be 102,000-12000-5000-20000.

[CubanMustGo]

NOW I remember why I dropped microeconomics both times I tried it. Thanks.

[spurs_2108]

Yeah the class makes you think way to much. We only have 4 problem sets like this (with about 4 or 5 questions) for the semester. So its not that bad, yet. This is the only one I can't answer.

[The Reckoning]

accounting profit is the total profit after subtracting explicit cost but not implicit, which means its the profit without subtracting how much money he could be making doing something else. idk the answer right away but i guess thats a start...

$102,000-$12,000-$5,000-$20,000-$40,000 = accounting profit = $25,000

$102,000-$12,000-$5,000-$20,000-$40,000-$4,000-$15,000-$3,000 = normal profit = $3,000

normal profit if above zero = economic profit = $3,000
normal profit if below zero = economic loss = 0

bear with me because im in the same class haha so im trying to learn this crap as well...

im a little iffy about his $40,000 invested... if he started the company that year.

thats a gay question haha but thats my honest guess

[spurs_2108]

Thanks. I know to get each profit so to say, i just don't know what numbers go where.

So far accounting maybe 65,000
Eco might be 53,000.

[spurs_2108]

Yeah Its not really worded right. So things can throw you off. I'm sure it wasn't done on purpose either. lol.

[Drachen]

What Does Economic Profit (or Loss) Mean?
The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA).

So based on the above definition, I would think that the economic profit is the actual revenue generated (102k) minus the opportunity cost of not opening the store (the 15k he would make plus the $400 he would make in interest off of his 40k). So $86600. Now, I am not an econ genius, I am just using the definitions available, and maybe your class notes are more concise. I have always found when taking a finance, or econ class that investopedia can usually explain things better than the book does. You might try looking there, that is where I got the definition above.

[RandomGuy]

Gomez runs a small firm that makes pottery. He hires on helper at $12,000 per yer, pays annual rent of $5,000 for his shop, and materials cost $20,000 per yer. Gomez has $40,000 of his own funds invested in equipment(pottery wheels, kilns, and so forth), which could earn him $4,00 per year if alternatively invested. Gomez has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents to be worth $3,000 per year. His total annual revenue from pottery sales is $102,000. Calculate (a) accounting profit; (b) economic profit; and (c) normal profits for Gomez's pottery firm.

Anyone know the answers to this question. Its confusing.

So far for accounting profit I thought It would be 102,000-12000-5000-20000.

The answer to this hinges directly on the definitions, so the first step in answering the question is looking up the specific definitions.
"Accounting costs" as an economic term:


(economics) The total amount of money or goods expended in an endeavour. It is money paid out at some time in the past and recorded in journal entries and ledgers.
http://dictionary.bnet.com/definition/accounting+cost.html

So, the accounting profit is purely the actual money earned minus the actual money spent. In this case (all figures in thousands):
102 - 12 - 5 - 20 -40 = $25 or, $25,000

From here it gets a bit tricky.
http://en.wikipedia.org/wiki/Profit_(economics)
Gives some definitions that help and investopedia also gives some useful information.

http://www.investopedia.com/terms/n/normal_profit.asp
http://www.investopedia.com/terms/e/economicprofit.asp

The question hinges on whether or not his estimation of his own "entrepreneurial talents" is treated as an opportunity cost. In this case, I would lean towards it being a useless data point, because it is not part of the opportunity costs, and it is not an accounting cost. It can't be considered an opportunity cost, because the other option, working for someone else, doesn't include forgone "entreprenurial income", as that is part of the previous calculations, and it is not actual money spent in running the business, so it isn't part of the accounting cost.

That said:
Economics cost is the accounting profit, minus any opportunity costs.

In this case the opportunity costs are the forgone income from investing the $40,000, or (4,000) and the salary (15,000)
25,000-4000-15000= $6,000

The normal profit seems to be the point where revenues=costs and in this case costs (based on the investopedia defintion) include the opportunity costs.


So normal profit would be (in thousands)
12 + 5 + 12 + 20 + 40 + 4 + 15 = 96,000

Alternately, if you have the economic profit, simply subtract the economic profit from the total revenues. 102 - 6 = 96

I am not 100% sure that I have the perfectly right answer, but that is probably pretty darn close.

Best to talk with the professor and get some clarification on it to be sure, as the "entrepreneurial cost" estimate thing is not something I am absolutely sure about, and it may have been specifically covered in the lecture.

Regards,
RG

[RandomGuy]

What Does Economic Profit (or Loss) Mean?
The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA).

So based on the above definition, I would think that the economic profit is the actual revenue generated (102k) minus the opportunity cost of not opening the store (the 15k he would make plus the $400 he would make in interest off of his 40k). So $86600. Now, I am not an econ genius, I am just using the definitions available, and maybe your class notes are more concise. I have always found when taking a finance, or econ class that investopedia can usually explain things better than the book does. You might try looking there, that is where I got the definition above.

I think the "$4,00" was a typo for "$4,000". Based on: the comma, plus the fact that $4000 is 10% of $40000, and seems to be a more realistic (heh, in normal economic times) rate of return than 1%.

[RandomGuy]

Hopefully I got it right. If not, maybe some super-smart auto-didact can provide the answer. (and that answer would probably be along the lines of "democrats suck and so does this problem") ;)

[Taco]

may i suggest using an..........
http://gwydir.demon.co.uk/jo/numbers/machine/abacus.jpg