Biff had a steady job at the golf course on Saturdays in whi

Biff had a steady job at the golf course on Saturdays in which he would earn $100. But Biff quit his job to sell hot dogs at the park on saturdays. This past Saturday he sold hot dogs for $3 each. His expenses were: $80 to rent the hot dog stand, $200 on all of the hot dog ingredients, $20 on napkins and other supplies. Questions: Calculate these: a) Biff\'s accounting profits b) Biffs economic profits

Solution

A) Accounting profit=Total revenue-Total explicit cost

Accounting cost=3Q-80-200-20=3Q-300

B) Economic cost=Accounting cost-Implicit cost=3Q-300-100=3Q-400

Implicit cost is the cost of self owned factor of production where opportunity cost of inputs are taken as proxy.

Whereas explicit cost is the cost of factor of production or inputs purchased from the market.