Explain how would the economic profit change

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3. 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. (Questions adapted from Thomas & Maurice, Managerial Economics, 2008)

a. Calculate the accounting profit and the economic profit in this scenario.

b. Calculate 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?

Reference no: EM1362770

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