Farmer McDonald gives banjo lessons for $20 an hour

Economics Dec 04, 2020

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 will yield $200 worth of crops, does McDonald earn an accounting profit? Does he earn an economic profit?

Expert Solution

1) Computation of Opportunity Cost:

Opportunity cost of spending 10 hours planting seeds = 10 hours of music lesson lost = 10 * $20 = $200 ( Implicit cost )

2) His accountant would only measure the explicit cost of seeds = $100

3) Computation of Accounting Profit:

Accounting Profit = Total Revenue - Explicit Costs = $200 - $100 = $100

4) Computation of Economic Profit:

Economic profit = Total revenue - Explicit costs - Implicit costs = 200 - 100 - 200 = 200 - 300 = - $100 ( loss )

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