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Gomez runs a small pottery firm. He hires one helper at $10,500 per year, pays annual rent of $4,500 for his shop, and spends $19,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $5,000 per year if alternatively invested. He has been offered $21,000 per year to work as a potter for a competitor. He estimates he could use his talents to earn an additional $3,000 per year in consulting fees if he were working full time as a potter. Total annual revenue from pottery sales is $71,000.Calculate the accounting profit and the economic profit for Gomez’s pottery firm.1. Accounting Profit = $______2. Economic Profit = $______

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facundobuzzetti

Answer:

Economic profit= $8,000

Accounting profit= $37,000

Explanation:

Giving the following information:

Costs:

Helper= $10,500 per year

Rent= $4,500

Materials= $19,000

Total= 34,000

Pottery Revenue= $71,000

Alternative= 5,000 + 21,000 + 3,000= $29,000

The difference between the economic profit and accounting profit is that the first one includes the opportunity cost of an alternative income.

Economic profit= 71,000 - 34,000 - 29,000= $8,000

Accounting profit= 71,000 - 34,000= $37,000