Suppose a farmer in georgia begins to grow peaches. he uses $1,000,000 in savings to purchase land, he rents equipment for $90 comma 00090,000 a year, and he pays workers $130 comma 000130,000 in wages. in return, he produces 100 comma 000100,000 baskets of peaches per year, which sell for $4.004.00 each. suppose the interest rate on savings is 55 percent and that the farmer could otherwise have earned $45 comma 00045,000 as a shoe salesman.

The peach farmer earns economic profit of $80,000

Therefore, accounting profit is $180,000

Explanation:

Economic Profit is calculated by deducting the opportunity cost and monetary costs from the revenue. Whereas Accounting Profit can be calculated by deducting the only monetary costs from the revenue.

Economic profit = Revenue - Opportunity cost - Monetary cost

Accounting profit = Revenue - Monetary cost

Opportunity costs are all those losses which are faced for choosing an alternative like loss of interest income in case of investment in the business.

In Economic term opportunity costs is known as implicit cost and monetary cost as explicit cost. Formula are

Economic profit = Revenue - Implicit cost - Explicit Expenses

Accounting profit = Revenue - Explicit cost

Implicit Costs

Interest Income = 5.5% x $1,000,000 = $55,000

Salary = $45,000

Total = $100,000

Explicit costs

Rent = $90,000

Wages = $130,000

Total = $220,000

Revenue = $100,000 x 4.00 = $400,000

Economic Profit = $400,000 - $100,000 - $220,000 = $80,000

Accounting Profit = $400,000 - $220,000 = $180,000