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Xavier 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. Xavier has an accounting profit of ________ and an economic profit of _______. a. $50, $10 b. $90, $50 c. $10, $50 d. $50, $90

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Principles of Microeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971493

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Chapter
Section
BuyFindarrow_forward

Principles of Microeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971493
Chapter 13, Problem 1CQQ
Textbook Problem
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Xavier 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. Xavier has an accounting profit of ________ and an economic profit of _______.

a. $50, $10

b. $90, $50

c. $10, $50

d. $50, $90

To determine
Accounting profit and economic profit.

Answer to Problem 1CQQ

Option ‘a’ is correct.

Explanation of Solution

Option (a):

When Xavier 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):

Xavier 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 Xavier spends $10 for ingredients and sells $60 worth of lemonade, Xavier 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 Xavier 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.

Economics Concept Introduction

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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