The Lynx Manufacturing Company produces components used in electronic toys. In fiscal year 2017, Lynx earned an accounting profit of $3 million. However, Lynx's production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs. Which of the following statements is true?
A) Lynx earned an economic profit of $5.5 million.
B) Lynx earned an economic profit of $500,000.
C) Lynx suffered an economic loss of $500,000.
D) Lynx suffered an economic loss of $2.5 million.

Question

Quizplus · Accepted Answer

Opportunity costs capture the value of the best forgone alternative use of the resources employed. Lynx's opportunity costs are the $2 million in revenues it would have earned and the $500,000 in costs it would have saved if it would have chosen to produce mobile phone components rather than electronic toy parts. Thus, the total opportunity cost was $2.5 million. After subtracting the $2.5 million in opportunity costs from the $3 million accounting profit, Lynx earned an economic profit of $500,000.

The Lynx Manufacturing Company Produces Components Used in Electronic Toys