Farmer McDonald gives banjo lessons for $20 an hour. One day, he spends 10 hours
ID: 1120375 • Letter: F
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?
My answers: Would the OC be $200. Accountant woud measure $100. If seeds yield $200 worth of crops, he does earn accounting profit (of $100). He does not earn an economic profit.
A brief clarification if I got the answers wrong would be appreciated, thank you! :)
Explanation / Answer
Opportunity cost is what you give up to get an item. Here in 10 hours, Farmer McDonald earns from banjo lessons $200. Instead of that if he spends 10 hours in planting he has to give up $200. So the opportunity cost is $200.
Opportunity cost is not measured by the accountant. He would measure the planting cost which is $100.
Accounting profit= (Yield from crop-cost of planting)=(200-100)=$100
Economic profit= Accounting profit-opportunity cost=100-(20*10)=-$100
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