Question

Mr. Brennan owns an open field adjacent to his house. The coach of the local high school football team offered Mr. Brennan \(\$ 250\) to rent the field from him for his team's summer football drills. Mr. Brennan could also grow vegetables on the field. The cost of seed, fertilizer, and hiring neighborhood teenagers to plant and harvest the field he estimates would be \(\$ 200\) and \(\mathrm{Mr}\). Brennan expects to receive \(\$ 500\) if he sold the vegetables. What are the explicit and implicit costs to Mr. Brennan of growing vegetables, and will he choose to grow vegetables or rent the field?

Short answer

In summary, the explicit costs of growing vegetables are $200, which include the cost of seeds, fertilizer, and hiring neighborhood teenagers. The implicit costs are $250, which is the foregone income from not renting the field to the football team. The profit from growing vegetables is $300, while the profit from renting the field is $250. Since the profit from growing vegetables is higher, Mr. Brennan should choose to grow vegetables. The difference of $50 represents the implicit costs of growing vegetables.

Step-by-step solution

Identify the explicit costs of growing vegetables

Explicit costs are the actual out-of-pocket expenses that Mr. Brennan would incur if he decided to grow vegetables on his field, which in this case are: 1. Cost of seeds and fertilizer. 2. Cost of hiring teenagers to plant and harvest the field. To find the explicit cost, simply add the costs mentioned in the exercise: 200 (cost of seeds and fertilizer) + 0 (no mentioning of the cost to hire the teenagers, so assume it's included in the seed and fertilizer cost) = $200

Identify the implicit costs of growing vegetables

Implicit costs are the opportunity costs of using the resources in a particular way, i.e., the foregone income from not renting the field to the football team. The implicit cost in this case is the rent Mr. Brennan would forgo if he chose to grow vegetables instead of renting the field to the football team. This rent is given in the exercise as $250.

Calculate the profit from growing vegetables

To calculate the profit from growing vegetables, subtract the explicit costs from the total revenue Mr. Brennan would earn from selling the vegetables. Total revenue from selling vegetables = $500 Explicit costs = $200 Profit from growing vegetables = Total revenue - Explicit costs = 500 - 200 = $300

Calculate the profit from renting the field

The profit from renting the field is the rent Mr. Brennan would receive from the football team since there are no associated costs with this option. Profit from renting the field = Rent received = $250

Compare the profits and make a decision

Now that we have calculated the profit from both options, we can compare them to determine which one is more profitable for Mr. Brennan. Profit from growing vegetables = $300 Profit from renting the field = $250 Since the profit from growing vegetables (\(300) is higher than the profit from renting the field (\)250), Mr. Brennan should choose to grow vegetables. Remember that the difference of $50 also represents the implicit costs of growing vegetables, as it's the foregone income from not renting the field.

Key concepts

Explicit Costs

Explicit costs are the clear, out-of-pocket expenses that Mr. Brennan would face if he decides to grow vegetables on his field. These are direct payments that cover the necessary supplies and labor. In this scenario, the explicit costs include:

• The cost of seeds.
• The cost of fertilizer.
• The cost of hiring neighborhood teenagers to help with planting and harvesting.

Explicit costs are easy to identify and are considered actual transactions that involve financial expenditures. According to the exercise, the explicit costs for Mr. Brennan amount to $200. This includes costs for seeds and fertilizer, while the cost for labor is assumed to be part of this total, as no separate figure is given.

Implicit Costs

Implicit costs are less obvious. They represent the opportunity cost of a foregone opportunity.
In Mr. Brennan's case, if he grows vegetables, the implicit cost is the potential rent income he forgoes by not renting the field to the football team.

Implicit costs may not involve direct money transactions, but they do indicate the value of the next best alternative that is sacrificed. Here, the implicit cost is the $250 offer from the local high school coach for renting the field. Understanding implicit costs helps in assessing the true economic cost of decisions beyond just out-of-pocket expenses.

Profit Calculation

Profit calculation involves evaluating both revenues and costs to find out which option is financially better.
To calculate profit from growing vegetables, Mr. Brennan subtracts his explicit costs from the total revenue earned by selling the vegetables.
Based on the given figures, his revenue from vegetables is \(500, and his explicit costs are \)200. Thus, his profit calculation is: \[Profit_{veg}= Total \, Revenue - Explicit \, Costs = 500 - 200 = 300 \]
Now, to compare, the profit from renting the field is straightforward. There are no explicit costs, only the rent income, which is $250. So the profit from renting the field is simply:\[Profit_{rent}= Rent \, Income = 250 \]
By computing both, Mr. Brennan can measure profitability for both cases.

Decision Making

Decision-making involves choosing the option with the highest profitability after considering both explicit and implicit costs. For Mr. Brennan, the decision boils down to comparing the profits from both potential uses of his field.

We calculated the profit from growing vegetables as $300, whereas renting the field yields $250. Since $300 > $250, Mr. Brennan would gain more by choosing to grow vegetables.
However, it’s important also to consider the implicit costs. The lost rent of $250 reflects both an opportunity cost and part of his decision-making process. Yet, even after accounting for implicit costs, the direct comparison in profits shows it’s more beneficial for him to grow vegetables. This illustrates how opportunity cost should weigh heavily in decisions to optimize gains.