Calculating Profit
Farmer Joe is trying to determine whether he should keep his farm open or go to work at the
local factory. Given the situations below, help him make his decision. Calculate
accounting, economic, and normal profit.
1. Farmer Joe has to make payments for the land and physical capital he uses of $10,000.
He also supplies his labor, which would be worth $11,000 if he worked at the local factory.
After selling all of his produce, his total revenue is $22,000. Given this information,
determine if Farmer Joe should continue farming by calculating accounting, economic, and
normal profit.
Explicit Costs: Land + Physical Capital
Implicit Costs: Labor
Accounting Profit: $22,000 - $10,000 = $12,000
Economic Profit: $22,000 - $10,000 - $11,000 = $1,000
Normal Profit: $11,000 (sum of implicit costs)
2. It is the following year and Farmer Joe’s total revenue only equaled $20,000. Given this
information, determine if Farmer Joe should continue farming by calculating accounting,
economic, and normal profit.
Explicit Costs: Land + Physical Capital
Implicit Costs: Labor
Accounting Profit: $20,000 - $10,000 = $10,000
Economic Profit: $20,000 - $10,000 - $11,000 = -$1,000
Normal Profit: $11,000
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3. Now, imagine Farmer Joe inherited his land, which means he only has to pay for the
physical capital, which costs $4,000. If he works at the factory, he could rent his land out
for $6,000. He could make $11,000 if he worked at the factory. If his total revenue still
equals $20,000, should he farm? Given this information, determine if Farmer Joe should
continue farming by calculating accounting, economic, and normal profit.
Explicit Costs: Physical Capital
Implicit Costs: Land Rental + Labor
Accounting Profit: $20,000 - $4,000 = $16,000
Economic Profit: $20,000 - $4,000 - $6,000 - $11,000 = -$1,000
Normal Profit: $6,000 + $11,000 = $17,000