Question

Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What opportunity cost has he incurred? What cost would his accountant measure? If these seeds yield $200 worth of crops, does McDonald earn an accounting profit? Does he earn an economic profit?

Answer 1

Answer:

The opportunity cost is $200.

The accountant would measure the cost at $100.  

The accounting profit will be $100.

There will be a negative economic profit of $100.  

Explanation:

Farmer McDonald's earning from banjo lessons is $20 per hour.  

If he spends 10 hours planting $100 worth of seeds.  

The explicit cost here is $100.  

The implicit or opportunity cost is  

= $20\ \times\ 10$

= $200

The accounting cost includes only explicit costs, so the accountant would measure the cost at $100.  

If the revenue from the crops is $200, then the accounting profit will be

= Total revenue - Explicit costs

= $200 - $100

= $100

Economic profit will involve both explicit as well as implicit cost .

Economic profit

= Total Revenue - (Explicit cost + Implicit cost)

= $200 - ($100 + $200)

= $200 - $300

= -$100

So the farmer will have a loss of $100.