Question

Linda sells 100 bottles of homemade ketchup for \(\$ 10\) each. The cost of the ingredients, the bottles, and the labels was S700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her S20 per hour. Linda's accounting profit_____________ is while her economic profit is_______________. a. \(\$ 700 ; \$ 400\) b. \(\$ 300 ; \$ 100\) c. \(\$ 300 ;\) negative \(\$ 100\) d. \(\$ 1,000 ;\) negative \(\$ 1,100\)

Short answer

Linda's accounting profit is $300, while her economic profit is negative $100. Answer: c.

Step-by-step solution

Calculate Total Revenue

First, determine Linda's total revenue from selling the ketchup bottles.Linda sells 100 bottles, each for \(10, so her total revenue is: \[ 100 \text{ bottles} \times \\)10 = \$1000 \]

Calculate Total Costs

Find the total costs incurred. The cost of ingredients, bottles, and labels is \(700. Next, calculate the opportunity cost: Linda took 20 hours off from a job that pays \)20 per hour. The opportunity cost is: \[ 20 \text{ hours} \times \\(20 = \\)400 \]Thus, the total costs, which include both explicit costs and opportunity costs, are:\[ \\(700 + \\)400 = \$1100 \]

Calculate Accounting Profit

Accounting profit is found by subtracting explicit costs from total revenue, ignoring implicit costs:\[ \text{Accounting Profit} = \text{Total Revenue} - \text{Explicit Costs} \]\[ \\(1000 - \\)700 = \$300 \]

Calculate Economic Profit

Economic profit takes into account both explicit and implicit costs (opportunity cost):\[ \text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs}) \]\[ \\(1000 - (\\)700 + \\(400) = \\)1000 - \\(1100 = -\\)100 \]

Key concepts

Opportunity Cost

Opportunity cost is a fundamental concept in economics, referring to the potential benefits or income you give up when choosing one option over another. In Linda's scenario, she spent 20 hours making ketchup instead of working at her job, where she earns $20 per hour. Thus, her opportunity cost is the income she sacrificed by not working these hours.
This amounts to:

• 20 hours ✕ $20/hour = $400

Opportunity cost is important because it helps in assessing the true cost of any business venture or activity beyond the immediate expenses. By factoring in opportunity costs, one can better understand the total impact of their economic decisions.

Total Revenue

Total revenue represents the total money earned from selling goods or services. For Linda, her total revenue comes from selling 100 bottles of homemade ketchup at $10 each. Calculating total revenue is straightforward:

• 100 bottles ✕ $10/bottle = $1000

This measurement is crucial as it forms the starting point for analyzing profits, both accounting and economic. Understanding total revenue helps individuals and businesses gauge how successful they are in generating income from their products or services.

Explicit Costs

Explicit costs are direct, out-of-pocket expenses associated with a business operation. In Linda's case, explicit costs include the cost of materials like ingredients, bottles, and labels for her ketchup. These costs total:

• $700

Explicit costs are easy to compute as they represent the clear, tangible expenses incurred. In calculating profit, explicit costs are first subtracted from total revenue to determine accounting profit. This differs from economic profit, where both explicit and implicit (such as opportunity) costs are considered together.