Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Question
Chapter 8, Problem 2E
a)
To determine
B’s accounting profits.
b)
To determine
B’s economic profits.
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Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a current market value of $4 million. Bowen owes his local bank $3 million. Last year Bowen sold $5 million worth of cotton. His variable operating costs were $4.5 million; accounting depreciation was $40,000, although the actual decline in value of Bowen's machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $30,000. Bowen can invest any funds that would be derived if the farm were sold to earn 10 percent annualy. (ignore taxes.)
a. Compute Bowen's accounting profits.
b. Compute Bowen's econnomic profits.
Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a current market value of $10 million. Bowen owes his local bank $7 million. Last year Bowen sold $9 million worth of cotton. His variable operating costs were $7 million; accounting depreciation was $40,000, although the actual decline in value of Bowen's machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $30,000. Bowen can invest any funds that would be derived if the farm were sold to earn 10% annually. (Ignore taxes.)
What is Bowen's accounting profit?
$1,210,000.00
$1,550,000
$1,560,000
$1,220,000.00
What is Bowen's economic profit?
$1,210,000.00
$1,560,000
$1,550,000
$1,220,000.00
Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a minibus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, and depreciation. She estimates that her entrepreneurial skills would have typically yielded a normal profit of $5,000 in another business. (a) Complete the following questions: (1) What are Jane’s total revenues? (2) What are Jane’s explicit costs? (3) What is her accounting profit? (b) List the important implicit costs that Jane has not included. (c) What is Jane’s pure economic profit (loss)?
Chapter 8 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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