Question

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?

Answer 1

The accounting cost = $25000+$40000+$25000 = $90000

While the economic cost = Accounting cost + Cost of self owned input factor or imputed cost of self owned factors

Therefore, Economic cost = $90000 + $20000 = $110000

Yes, family’s economic cost ever exceed its accounting cost because while estimating accounting cost family will not measure the imputed cost of self owned factors. The family could earn $20000, if they use their labor in some other occupation and therefore it is the imputed cost of family's labor. Accounting cost does not take imputed cost or implicit cost into calculation.