Question

Read the scenario below and answer the question that follows: George Richard is a farmer who is also a skilled metal worker. He makes unique garden sculptors that could earn him R400 per hour. One day he spent 10 hours planting R5 000 worth of seeds on his farm.

2.2.1 Measure George’s opportunity cost. (4)

2.2.2 Determine the cost that is measured by his accountant. (4)

2.2.3 If the seeds George planted yield R10 000 worth of crops, argue the point that George does earn an accounting profit. (4)

2.2.4 Would you advise George to continue as a farmer or switch to metal work? (10)

Answer 1

1) Opportunity cost is the cost foregone of the next best alternative. When George is farming, he is foregoing R400 per hour. So his opportunity cost would be R400 per hour or R4000 per hour, if we assume he works for 10 hours a day.

2) The cost that is measured by accountant would be the cost of seeds ie R5000 which are being planted by him. His accountant would not take into account the opportunity cost.

3) Accounting profit is an explicit profit. in this case, the costs to George are R 5000 and the yield is worth R10,000. Hence he has an accounting profit of R5000 ie revenue- costs

4) George should continue to work as a farmer. This is because when his economic profit is calculated ie the profit after the opportunity costs or the implicit cost, then also he is better off as a farmer.

Economic profit= Total revenue- explicit cost- implicit cost

= R10,000-5,000-4000= R1000

Hence he is better off as a farmer than a skilled metal worker.

(You can comment for doubts)