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16 June, 08:21

Suppose a farmer in Georgia begins to grow peaches. He uses $1,000,000 in savings to purchase land, he rents equipment for $70 comma 00070,000 a year, and he pays workers $120 comma 000120,000 in wages. In return, he produces 250 comma 000250,000 baskets of peaches per year, which sell for $3.003.00 each. Suppose the interest rate on savings is 22 percent and that the farmer could otherwise have earned $40 comma 00040,000 as a shoe salesman. What is the farmer's economic profit?

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  1. 16 June, 08:41
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    Economic profit = $300,000

    Explanation:

    Economic profit is the difference between the sales revenue and the total of implicit cost and explicit cost

    Implicit cost are opportunity costs. For the farmer, these include

    Interest on capital forfeited and salaries forfeited

    = (22% * 1,000,000) + 40,000

    = 260,000

    Total cost = Implicit + explicit costs

    = 260,000 + 260,000 + 70,000 + 120,000

    Economic profit = 750000 - (260,000 + 70,000 + 120,000)

    = $300,000

    Note that the cost of land is not included because it a capital cost
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