Question

Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each.
A. What are Wanda's explicit costs per glass?
B. What are Wanda's implicit costs per glass?
C. What are Wanda's total economic costs per glass?
D. What are Wanda's total accounting profits?
E. What are Wanda's total economic profits?

Answer 1

Answer:

A. $0.08

B. $0.10

C. $0.18

D. $126

E. $96

Explanation:

Given that,

Her costs per glass are as follows:

$0.01 for water,

$0.02 for sugar,

$0.03 for lemons,

$0.02 for cups, and

$0.10 for the opportunity cost of her labor.

Number of glasses sells = 300

selling price of each glass = $0.50

A. Explicit costs refers to the cost that are incurred during the production of a good and can be directly measured. Here, the explicit costs are the cost of inputs.

Therefore, the explicit costs per glass is as follows:

= Water + Sugar + Lemons + Cups

= $0.01 + $0.02 + $0.03 + $0.02

= $0.08

B. Implicit costs refers to the cost of choosing some alternative over other alternative. It is also known as the opportunity cost.

Hence, the implicit cost per glass is the opportunity cost of her labor i.e, $0.10.

C. Total economic costs per glass = Explicit cost + Implicit cost

                                                        = $0.08 + $0.10

                                                        = $0.18

D. Total accounting profits is determined by deducting the explicit costs from the total revenue.

Total accounting profits:

= Total revenue - Total Explicit costs

= (300 × $0.50) - (300 × $0.08)

= $150 - $24

= $126

E. Economic profits:

= Total revenue - Total Explicit costs - Total Implicit costs

= (300 × $0.50) - (300 × $0.08) - (300 × $0.10)

= $150 - $24 - $30

= $96