7. Farm Profit [20 pts] A farmer-musician (Willie Nelson?) can give music lesson

Question

7. Farm Profit [20 pts] A farmer-musician (Willie Nelson?) can give music lessons at $20 per hour. One summer he spends $2000 and 100 hours growing and harvesting crops on land he owns that no one else wants to use. Suppose this yields crops worth $5000. a. What is the farmer's accounting profit (or loss)? b. What is his economic profit (or loss)? c. Explain the difference conceptually. Accounting Profit- Economic Profit = d. Why are economists interested in economic profit rather than accounting profit? e. How would you change the analysis for parts (a) & (b) if someone else were willing to pay to use his land?

Explanation / Answer

a.Accounting profit=total REvenue-Total cost(Explicit cost)=5000-2000=3000

b.Economic profit=Total Revenue -Total cost(implicit+explicit)=5000-(2000+100*20)=1000

c.Economic profit is lesser than accounting profit as it takes into consideration the opportunity cost of the time foregone.Here it is 20*100=$2000.

d.Economic profit takes into account the fact of optimum use of resources.It talks about the cost recurred by not opting for an alternative activity.It considers both the implicit and explicit cost.Hence Economists prefer using this concept over accounting profit.

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