Questions: During a year of operation, a firm collects 175,000 in revenue and spends 80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided 500,000 of their own money to the firm instead of investing the money and earning a 14 percent annual rate of return. What is the economic profit of the firm? 95,000 25,000 105,000

To determine the economic profit of the firm, we need to consider both the accounting profit and the opportunity cost of the owners' investment.

1. Calculate the accounting profit: Accounting profit is the difference between total revenue and explicit costs (expenses on raw materials, labor, utilities, and rent).

   \[ \text{Accounting profit} = \text{Total revenue} - \text{Explicit costs} \]

   Given: \[ \text{Total revenue} = \$175,000 \] \[ \text{Explicit costs} = \$80,000 \]

   \[ \text{Accounting profit} = \$175,000 - \$80,000 = \$95,000 \]

2. Calculate the opportunity cost: The opportunity cost is the potential earnings the owners forego by investing their money in the firm instead of elsewhere. The owners could have earned a 14% annual return on their \$500,000 investment.

   \[ \text{Opportunity cost} = 0.14 \times \$500,000 = \$70,000 \]

3. Calculate the economic profit: Economic profit is the accounting profit minus the opportunity cost.

   \[ \text{Economic profit} = \text{Accounting profit} - \text{Opportunity cost} \]

   \[ \text{Economic profit} = \$95,000 - \$70,000 = \$25,000 \]

Therefore, the economic profit of the firm is \$25,000.

The answer is: \$25,000

Explanation for each option:

• \$95,000: This is the accounting profit, not the economic profit.
• \$95,000: Same as above, this is the accounting profit.
• \$25,000: This is the correct economic profit after considering the opportunity cost.
• \$105,000: This is incorrect and does not match any relevant calculation in this context.