Instructor Manual For Agribusiness Management
7th Edition By Jay T. Akridge; John C. Foltz;
Elizabeth A. Yeager; Brady E. Brewer; Trey
Malone
Chapter 1: Accounting vs. Economic Profit
What is the formula for accounting profit?
Accounting profit = Total revenue – Explicit costs.
What is the formula for economic profit?
Economic profit = Total revenue – (Explicit costs + Implicit costs).
If a farmer earns $200,000 in revenue, pays $120,000 in explicit costs, and gives up
a $50,000 salary from a job elsewhere, what is the accounting profit?
$80,000 (200,000 – 120,000).
Using the same numbers, what is the economic profit?
$30,000 (200,000 – 120,000 – 50,000).
What type of cost is the value of the owner’s time that is not paid as a wage?
Implicit cost.
If a farm uses land it already owns without paying rent, is that an explicit or
implicit cost?
Implicit cost (the foregone rent the land could earn).
What is the opportunity cost of using a barn for storage instead of renting it out
for $10,000 per year?
$10,000 (implicit cost).
,A grain elevator reports $500,000 in revenue, $300,000 in wages, $50,000 in
utilities, $20,000 in loan interest. What is accounting profit?
$130,000 (500,000 – 300,000 – 50,000 – 20,000).
If the owner of that grain elevator could have earned $80,000 working elsewhere,
what is economic profit?
$50,000 (130,000 – 80,000).
When accounting profit is positive but economic profit is negative, what should a
manager consider doing?
Exiting the business or reallocating resources to a higher-value use.
Give an example of an explicit cost for a dairy farm.
Purchased feed, hired labor, veterinary services, or electricity bills.
Give an example of an implicit cost for a vineyard owner.
The owner’s foregone salary from not taking a corporate job, or the foregone interest
on the money invested in the vineyard.
If a farmer owns equipment outright, is depreciation an explicit or implicit cost?
Depreciation is usually treated as an explicit cost in accounting, but the opportunity cost
of the equipment’s alternative use is implicit.
True or false: Economic profit is always less than or equal to accounting profit.
True (because economic profit subtracts implicit costs).
What does a positive economic profit signal to other agribusinesses?
That the industry is profitable and may attract new entrants.
If a family farm does not pay itself a salary, how does that affect accounting vs.
economic profit?
Accounting profit is overstated relative to economic profit because the family’s labor is
an implicit cost.
,A farmer invests $100,000 of savings into a new irrigation system. If the savings
could have earned 5% interest elsewhere, what is the annual implicit cost?
$5,000 (the foregone interest).
What is the difference between economic profit and normal profit?
Normal profit is when economic profit = 0 (total revenue covers both explicit and
implicit costs, including a fair return to the owner).
If a farm’s economic profit is zero, is the owner doing poorly?
No – the owner is earning a normal profit, meaning they are covering all opportunity
costs.
How can ignoring implicit costs lead to bad long-term decisions?
A business may appear profitable (positive accounting profit) while actually destroying
wealth because resources could earn more elsewhere.
A custom harvester earns $150,000 revenue. Fuel and repairs = $40,000, hired
labor = $30,000, insurance = $10,000. The owner could have worked for $60,000
as a manager. Find accounting profit.
$70,000 (150,000 – 40,000 – 30,000 – 10,000).
Using the same data, find economic profit.
$10,000 (70,000 – 60,000).
What is a sunk cost? Give an agricultural example.
A cost already incurred that cannot be recovered. Example: Money spent on a
non-refundable soil test.
Should sunk costs affect future decisions about economic profit?
No – sunk costs are irrelevant; only future costs and benefits matter.
If a poultry farmer’s accounting profit is $100,000 and implicit costs are $40,000,
what is economic profit?
$60,000.
, If economic profit is negative, does that always mean the business should shut
down immediately?
Not necessarily – in the short run, if revenue covers variable costs, continue operating; in
the long run, exit if negative economic profit persists.
What is the relationship between economic profit and the return on investment
(ROI) compared to the next best alternative?
Economic profit measures how much ROI exceeds the opportunity cost of capital.
A farmer owns land worth $1 million. If the land could be rented for $50,000 per
year, how is that treated in economic profit?
As an implicit cost of $50,000.
What is the main reason managers should focus on economic profit rather than
just accounting profit?
Economic profit reveals whether the business is truly creating value after considering all
resources’ best alternative uses.
If a farm uses family labor and does not record wages, which profit measure is
misleadingly high?
Accounting profit.
What does it mean when we say “economic profit drives resource allocation in the
long run”?
Resources (land, labor, capital) flow toward industries where economic profit is positive
and away where it is negative.
Give an example of an implicit cost for a cooperative grain elevator.
The foregone interest on member equity that could have been invested elsewhere.
True or false: Depreciation is always an implicit cost.
False – depreciation is usually an explicit accounting cost, but the economic concept of
“capital consumption” is an implicit opportunity cost.
7th Edition By Jay T. Akridge; John C. Foltz;
Elizabeth A. Yeager; Brady E. Brewer; Trey
Malone
Chapter 1: Accounting vs. Economic Profit
What is the formula for accounting profit?
Accounting profit = Total revenue – Explicit costs.
What is the formula for economic profit?
Economic profit = Total revenue – (Explicit costs + Implicit costs).
If a farmer earns $200,000 in revenue, pays $120,000 in explicit costs, and gives up
a $50,000 salary from a job elsewhere, what is the accounting profit?
$80,000 (200,000 – 120,000).
Using the same numbers, what is the economic profit?
$30,000 (200,000 – 120,000 – 50,000).
What type of cost is the value of the owner’s time that is not paid as a wage?
Implicit cost.
If a farm uses land it already owns without paying rent, is that an explicit or
implicit cost?
Implicit cost (the foregone rent the land could earn).
What is the opportunity cost of using a barn for storage instead of renting it out
for $10,000 per year?
$10,000 (implicit cost).
,A grain elevator reports $500,000 in revenue, $300,000 in wages, $50,000 in
utilities, $20,000 in loan interest. What is accounting profit?
$130,000 (500,000 – 300,000 – 50,000 – 20,000).
If the owner of that grain elevator could have earned $80,000 working elsewhere,
what is economic profit?
$50,000 (130,000 – 80,000).
When accounting profit is positive but economic profit is negative, what should a
manager consider doing?
Exiting the business or reallocating resources to a higher-value use.
Give an example of an explicit cost for a dairy farm.
Purchased feed, hired labor, veterinary services, or electricity bills.
Give an example of an implicit cost for a vineyard owner.
The owner’s foregone salary from not taking a corporate job, or the foregone interest
on the money invested in the vineyard.
If a farmer owns equipment outright, is depreciation an explicit or implicit cost?
Depreciation is usually treated as an explicit cost in accounting, but the opportunity cost
of the equipment’s alternative use is implicit.
True or false: Economic profit is always less than or equal to accounting profit.
True (because economic profit subtracts implicit costs).
What does a positive economic profit signal to other agribusinesses?
That the industry is profitable and may attract new entrants.
If a family farm does not pay itself a salary, how does that affect accounting vs.
economic profit?
Accounting profit is overstated relative to economic profit because the family’s labor is
an implicit cost.
,A farmer invests $100,000 of savings into a new irrigation system. If the savings
could have earned 5% interest elsewhere, what is the annual implicit cost?
$5,000 (the foregone interest).
What is the difference between economic profit and normal profit?
Normal profit is when economic profit = 0 (total revenue covers both explicit and
implicit costs, including a fair return to the owner).
If a farm’s economic profit is zero, is the owner doing poorly?
No – the owner is earning a normal profit, meaning they are covering all opportunity
costs.
How can ignoring implicit costs lead to bad long-term decisions?
A business may appear profitable (positive accounting profit) while actually destroying
wealth because resources could earn more elsewhere.
A custom harvester earns $150,000 revenue. Fuel and repairs = $40,000, hired
labor = $30,000, insurance = $10,000. The owner could have worked for $60,000
as a manager. Find accounting profit.
$70,000 (150,000 – 40,000 – 30,000 – 10,000).
Using the same data, find economic profit.
$10,000 (70,000 – 60,000).
What is a sunk cost? Give an agricultural example.
A cost already incurred that cannot be recovered. Example: Money spent on a
non-refundable soil test.
Should sunk costs affect future decisions about economic profit?
No – sunk costs are irrelevant; only future costs and benefits matter.
If a poultry farmer’s accounting profit is $100,000 and implicit costs are $40,000,
what is economic profit?
$60,000.
, If economic profit is negative, does that always mean the business should shut
down immediately?
Not necessarily – in the short run, if revenue covers variable costs, continue operating; in
the long run, exit if negative economic profit persists.
What is the relationship between economic profit and the return on investment
(ROI) compared to the next best alternative?
Economic profit measures how much ROI exceeds the opportunity cost of capital.
A farmer owns land worth $1 million. If the land could be rented for $50,000 per
year, how is that treated in economic profit?
As an implicit cost of $50,000.
What is the main reason managers should focus on economic profit rather than
just accounting profit?
Economic profit reveals whether the business is truly creating value after considering all
resources’ best alternative uses.
If a farm uses family labor and does not record wages, which profit measure is
misleadingly high?
Accounting profit.
What does it mean when we say “economic profit drives resource allocation in the
long run”?
Resources (land, labor, capital) flow toward industries where economic profit is positive
and away where it is negative.
Give an example of an implicit cost for a cooperative grain elevator.
The foregone interest on member equity that could have been invested elsewhere.
True or false: Depreciation is always an implicit cost.
False – depreciation is usually an explicit accounting cost, but the economic concept of
“capital consumption” is an implicit opportunity cost.
