Suppose a farmer in georgia begins to grow peaches. he uses $1,000,000 in savings to purchase land, he rents equipment for $80,000 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 2 percent and that the farmer could otherwise have earned $45,000 as a shoe salesman.

(a)- the peach farmer earns economic profit of $ ?
(b)- the peach farmer earns accounting profit of $?

a) $305,000

b) $370,000

Explanation:

Given:

cost of land purchased = $1,000,000

Rent on equipment = $80,000

Wages paid = $150,000

Number of baskets produced = 200,000

Selling cost of basket = $3.00 each

Interest rate on savings = 2%

Earning as a shoe salesman = $45,000

Now,

Total revenue = Number of baskets produced × Selling cost of basket

= 200,000 × $3

= $600,000

Explicit cost = Rent on equipment + Wages paid

= $80,000 + $150,000

= $230,000

Implicit cost = Interest on amount spent to buy land + Earning as a shoe salesman

= 2% of $1,000,000 + $45,000

= $20,000 + $45,000

= $65,000

Therefore,

The total cost involved = Explicit cost + Implicit cost

= $230,000 + $65,000

=  $295,000

a) The peach farmer earns economic profit = Total revenue - Total cost

= $600,000 - $295,000

= $305,000

b) The peach farmer earns accounting profit = Total revenue - Explicit cost

=  $600,000 - $230,000

= $370,000

one of the appeals of a sole proprietorship is that business expenses are kept separate from your personal income tax return