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
= [tex]$20\ \times\ 10[/tex]
= $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.
