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

Opportunity cost

Refers to the value of something foregone in order to choose something else.

In the above case,

$In\space 10hours$ he would obtain;

$20*10 = 200 dollars$

McDonald opts to plant seeds worth $100. In this scenario he does not earn but spend on his firm what he already has in possession, at the same time still has the money in form of the crops

The total opportunity cost is therefore

$200\space dollars$

Accounting profit = total monetary revenue- total costs. 

Economic profit = total revenue – (explicit costs + implicit costs).

McDonalds makes an accounting profit.

Accounting profit$=$ $200- 100 = 100$

The economic profit is negative as seen below;

Economic profit$=200- (100+200) = -100$