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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Raj opens up a lemonade stand for two hours He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor’s lawn for $40. Raj has an accounting profit of _____ and an economic profit of _____.

  1. a. $50, $10
  2. b. $90, $50
  3. c. $10, $50
  4. d. $50, $90

To determine
Accounting profit and economic profit.

Answer

Option ‘a’ is correct.

Explanation

Option (a):

When Raj spend $10 for ingredients and sell $60 worth of lemonade, then the accounting profit will be (Total revenueTotal explicit cost) (total revenue – total explicit cost) $50($60$10). Economic profit is (Total revenue(Implicit cost +Explicit cost)) $10 ($60($50+$10)) . Therefore, the value of accounting profit is $50 and the economic profit is $10.

Option (b):

Raj accounting profit is not $90, because an accounting profit is the total revenue minus the total explicit cost. Economic profit is not $50, because economic profit is total revenue minus implicit and explicit cost. Thus, option ‘b’ is incorrect.

Option (c):

When Raj spends $10 for ingredients and sells $60 worth of lemonade, Raj accounting profit will not be $10, because an accounting profit is the total revenue minus the total explicit cost. Economic profit is not $50, because economic profit is the total revenue minus implicit and explicit cost. Thus, option ‘c’ is incorrect.

Option (d):

When Raj spend $10 for ingredients and sell $60 worth of lemonade, then the accounting profit will be (total revenue – total explicit cost) $50($60$10) . But the economic profit is not $90, because the economic profit is (Total revenue(Implicit cost +Explicit cost)) . Thus, option ‘d’ is incorrect.

Concept

Concept introduction:

Accounting profit: Accounting profit refers to the total revenue minus total explicit cost

Economic profit: Economic profit refers to the total revenue minus implicit and explicit cost.

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