Question

Katherine gives piano lessons for $15 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Katherine's accounting profits are
A. $75, and her economic profits are $125.
B. $100, and her economic profits are $75.
C. $100, and her economic profits are $25.
D. $25, and her economic profits are $100.

Answer 1

Answer:

The accounting profits are $100, and the economic profits are $25

The option C. is correct

Explanation:

Accounting profit: The accounting profit is computed by subtracting the sales amount with the expenses.

In mathematically,

Accounting profit = Sales revenue - expenses

                             = $150 - $50

                             = $100

In this, the expense is the seeds cost

And, the economic profit is calculated by subtracting the accounting profit with the implicit cost

In mathematically,

Economic profit = Accounting profit - implicit cost

                          = $100 - $75

                          = $25

The implicit cost is computed by

= Per hour piano charges × number of hours

= $15 × 5

= $75

Hence, the accounting profits are $100, and the economic profits are $25