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ECON MICRO

5th Edition
William A. McEachern
ISBN: 9781337000536

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ECON MICRO

5th Edition
William A. McEachern
ISBN: 9781337000536
Textbook Problem

(Explicit and implicit Costs) Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn accounting profit of $200 per acre. Is he currently earning an economic profit? Why or why not?

To determine

Whether Amos McCoy is currently earning an economic profit or not.

Concept Introduction:

Amos McCoy is not currently making an economic profit. Difference between the revenue received from the sale of an output and the opportunity cost of the inputs is called economic profit. Total earnings calculated according to generally accepted accounting principles (GAAP) is called accounting profit.

Explanation

Both alternatives are considered (i.e explicit and implicit cost) while estimating economic cost. Accounting cost does not take into consideration implicit cost. Opportunity cost associated with raising soyabean is being ignored while calculating accounting profit. While raising corn at a profit of $100 per acer, profit of $200 per acer is being ignored on soyabean. Economic loss of $100 is being incurred ($200-$100=$100). Amos McCoy is not currently making an economic profit. In the end, it should be concluded that he should grow soyabeans and get out of the corn business.

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