During a year of operation, a firm collects $175,000 in revenue and spends $80,000 on raw materials, labor expenses, utilities and rent. The owners of the firm have provided $500,000 of their own money to the firm (and view that money as a loan to the firm) instead of investing the money and earning a 9 percent annual rate of return. (problems adapted from Thomas & Maurice, Managerial Economics, 2008)
a. find out the accounting profit and the economic profit in this scenario.
b. find out the implicit and explicit cost
c. If the owners could have earned a 20% annual rate of return on the invested money, how would the economic profit change (all else equal)? How would the accounting profit change?