Jeremy, a small business owner, earns $50 an hour repairing boats.One afternoon he takes five hours off work to build a gazebo in his garden, spending $200 on materials.If the addition of a gazebo increases his home's value by $400, then his accounting profit will be:

Question

Quizplus · Accepted Answer

To calculate Jeremy's accounting profit, we need to subtract his total costs (including his opportunity cost, which is the income he could have earned during the five hours he spent building the gazebo) from his revenue (the increase in his home value).

Revenue: 
Increase in home value = $400

Costs: 
Opportunity cost = 5 hours x $50/hour = $250
Materials cost = $200

Total costs = $250 + $200 = $450

Accounting profit = Revenue - Total Costs
= $400 - $450
= -$50

Since the accounting profit is negative, it means that Jeremy has not earned a profit from building the gazebo. Therefore, the best choice is C, which represents the cost of materials, and is the only cost that Jeremy can recover from building the gazebo.

Jeremy, a Small Business Owner, Earns $50 an Hour Repairing