Economic Question? OMG Please Help!!?

Question

Quest realty revenues $100,000,000 with Net income of 30,000,000

Last year Quest realty owned and occupied an office building in downtown Indianapolis. The building could have been leased to other businesses for $2,000,000 in lease income. Quest realty also owned undeveloped land valued at $15,000,000. Owners can earn a 14% rate of return on funds invested elsewhere. What are the explicit costs and the explicit (accounting) Profit/Loss? What are the implicit costs? What is the economic profit/loss? What is the rationale behind the difference between he accounting and economic profit?

Answer 1

Net income = Total revenue - Explicit costs

Explicit costs =  Total revenue - Net income

Explicit costs = 100'000'000 - 30'000'000 = 70'000'000

Explicit (accounting) Profit = Net income = 30'000'000

Implicit costs = 2'000'000 + (15'000'000 x 14%) =

= 2'000'000 + (15'000'000 x 0.14) =

= 2'000'000 + 2'100'000 = 4'100'000

Economic profit = Accounting Profit - Implicit costs =

= 30'000'000 - 4'100'000 = 25'900'000

Rationale behind difference is - economic profit takes into account forgone opportunity income.