Question

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]

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