Mary Jones can work in a factory and earn $16,000 a year or, alternatively, be a farmer. Assume that except for monetary reward, she doesn’t care which she does. To farm, Mary has to invest her savings of $20,000. The annual cost of seed, fertilizer, etc., is $5,000. She could earn 10 percent annually on her best alternative investment.

a. What is the total cost of farming (including implicit costs)?

b. What is the minimum Mary must make in farming to just make it worthwhile?

c. If her farm revenues are $30,000, what is her economic profit? Her accounting profit? Should she stay in farming?

d. Answer

(c) above for revenues of $20,000.