# Accounting Equilibrium Calculations

## Accounting Equilibrium Calculations

﻿1.    Xander Harris is considering whether to buy a corn and soybean farm in Iowa. The farm will cost \$800,000, and Xander will be able to pay this from profits his recently deceased mother made on the stock market and willed to him. He estimates that if he does not run the farm, and keeps his current job as an economic forecaster, he will be able to earn \$40,000 a year. The prevailing interest rate is 9 percent. Xander’s only motive is to maximize his income.
a)   Should he buy the farm, and become a farmer from an accounting viewpoint if his accountant tells him the annual profit from the farm is likely to be:
i)    \$160,000?
ii)  \$100,000?
iii) \$50,000?
Accountants focus on explicit costs and revenue. It does not usually include the cost of ownership. From an accounting viewpoint, Xander should buy the farm and become a farmer in the above annual profit scenarios.

a) Since he is currently an economist, Xander decides to recalculate the profit figures in a) according to the logic used by economists rather than accountants. What profit figures does he come up with? Do these new figures cause him to change his mind about becoming a farmer?
Economist focus on both explicit and implicit costs and revenue.
Therefore, Economic profit = (explicit and implicit revenue) - (explicit and implicit cost)
The profit figures recalculated using economic logic will be less than the figures recalculated using accounting logic. Xander Harris will more than likely change his mind about owning the farm.

The demand and supply schedules for simple calculators and for T-shirts are as follows:

Calculators                                 T-shirts
Price             Demand            Supply            Demand            Supply
\$16                  600                 ...