Question

George Richard is a farmer who is also a skilled metal worker. He makes unique garden sculptors that could earn him R400 per hour. One day he spent 10 hours planting R5 000 worth of seeds on his farm.

Measure George’s opportunity cost

Determine the cost that is measured by his accountant.

If the seeds George planted yield R10 000 worth of crops, argue the point that George does earn an accounting profit.      

Would you advise George to continue as a farmer or switch to metal work?          

Answer 1

George's opportunity cost=Amount that could have been earned in making sculptures

George's opportunity cost=10*400= R 4000

Cost measured by his accountant=Cost of seeds=R 5000

Total Revenue=R 10000

Accounting profit=Total Revenue-Accounting cost=10000-5000=R 5000

Since Revenue is higher than the accounting costs, we can say that George earns accounting profit in this case.

Economic Profit=Total Revenue-Accounting cost-Opportunity cost

Economic Profit=10000-5000-4000=R 1000

Since economic profit is positive, we can say that George should continue to work as farmer.