Farmer Mcdonald gives banjo lessons for $20 an hour. One day, instead of giving banjo lessons, he spends 10 hours planting $100 worth of seeds on his farm. The seeds yield crops that he can sell for $200. What are the accounting costs, economic costs, accounting profit, and economic profit associated with growing crops?
Accounting cost is monetary value of resources used in performing an activity. In our case it is the worth of seeds - $100. Economic cost differs from accounting cost because it includes opportunity cost. In our case opportunity cost is $20per hour×10hours=$200. So economic cost is $100+$200=$300. Accounting profit is consists of revenue minus explicit costs: $200-$100=-$100. Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs: $200-$300=-100$ (loss)