Answer to Question #58087 in Microeconomics for Katie

Question

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?

Answer 1

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)

Answer
$100; $300; $100; -100$ (loss)