Question

Justin started a small cage-free organic egg farm last year. He manages the farm himself, foregoing...

Justin started a small cage-free organic egg farm last year. He manages the farm himself, foregoing the salary he earned as a computer technician. Use the information in the following table to answer the questions below.

Water usage

$6,000

Electricity

$5,000

Interest payments on a bank loan which Justin borrowed to help start the farm.

$10,000

Justin gave up his job as a computer technician to work on the farm.

$55,000

Justin invested $50,000 of his own money in the farm which would have earned 5% interest

Organic poultry feed

$8,000

Wages paid to part-time workers

$24,000

Poultry-farm Insurance

$5,000

The farm produces 50,000 dozen eggs and Justin sells them at $3 per dozen.

  1. Calculate Justin’s explicit costs – show all calculations. [2 marks]
  2. What is Justin’s accounting profit? [1 mark]
  3. What is the dollar value of Justin’s implicit costs? [1 mark]
  4. What is Justin’s economic profit? [1 mark]

Homework Answers

Answer #1

a) explicit costs are the cost that involve cash payment to the factors of production

Explicit cost = insurance + wages to workers + feed + interest payment + electricity + water

= 5000 + 24000 + 8000 +10,000 + 6000 + 5000

= 58000

B) accounting profit = total revenue - explicit cost

= 50,000*3 - 58000

= $92000

C) implicit cost = salary that could have been earned from working as technician + interest that could have been earned from lending the money in market

= 55000 + 2500

= $57,500

D) economic profit = total revenue - explicit cost - implicit cost

= 150,000 - 58000 - 57,500

= $34,500

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