Question

Suppose that a small family farm sold its output for $100,000 in a given year. The...

Suppose that a small family farm sold its output for $100,000 in a given year. The family spent $25,000 on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including maintenance. The family members could have earned $20,000 working at other occupations. What is the family’s accounting cost? What is the family’s economic cost? Could the family’s economic cost ever exceed its accounting cost? Why or why not

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Homework Answers

Answer #1

Accounting cost includes explicit cost only that is the actual payment made by the firm

Economic cost included explicit cost as well as the implicit cost by the firm. Here implicit cost means the opportunity cost of the firm's owner.

Accounting cost= Fuel expenditure+ expenditure on seeds and fertilizers+ maintainance cost

Accounting cost= 25000+40000+25000= $90000

Economic Cost= Accounting cost + Family's opportunity cost

Economic cost= $90000+$20000 = $110,000

Yes, Economic cost will always at least equal or higher than the accounting cost because accounting cost is a narrow concept which itself is a component of economic cost while the economic cost is a wider concept.

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