Question

Aji Fatou can produce either apples or oranges on her farm and the explicit cost of production is the same for both. At the moment she’s growing apples. Her accountant tells her that she is making money. Aji Fatou’s friend, who is an economist, also tells her that she is making profits. This must mean that the revenue from growing apples is greater than

a.The explicit cost of growing apples

b.The revenues from growing oranges

c.The opportunity cost of growing apples

d.All of the above

Answer 1

Let Total revenue from growing apples be A, Explicit cost of growing apples = Explicit cost of growing oranges = E and Revenue from growing oranges be O.

Accountant tells her than she is making money => Accounting profit = Total revenue - Explicit cost > 0

=> A - E > 0 => A > E. So,Revenue from growing apples must be greater than explicit cost of growig apples. Thus option (a) is correct

Her economist tells her than she is making Profit => Economic profit = Total revenue - Explicit cost - implicit cost > 0

Implicit cost is the profit she sacrificed by growing apples instead of oranges and that profit = Total revenue from oranges - Explicit cost = O - E

So, Economic profit = Total revenue - Explicit cost - implicit cost > 0 => .A - E - (O - E) > 0 => A > O

Thus, Reveneu from growing apples must be greater than revenue from growing oranges. Thus option (b) is correct as well.

Opportunity cost of growing apples = Implicit cost + Explicit cost and as discussed above Revenue is greater than (explicit cost + implicit cost) as she is making positive economic profit. So, option (c) is also correct

Hence the correct answer is (d) All of the above.