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Chapter 9: Problem 1

A firm with explicit costs of \(\$ 2\) million, no implicit costs, and total revenue of \(\$ 3\) million would have (LO2) a) zero economic profit b) zero accounting profit c) an accounting profit and an economic profit of \$1million d) a higher economic profit than an accounting profit e) a higher accounting profit than economic profit

Short Answer

Expert verified
Answer: c) an accounting profit and an economic profit of $1 million

Step by step solution

01

Understanding Accounting Profit and Economic Profit

Accounting profit is the total revenue minus explicit costs. Explicit costs are the actual monetary payments made by a firm to the factors of production, such as wages and rent. Economic profit is the total revenue minus both explicit and implicit costs. Implicit costs are the opportunity costs of resources owned by the firm and are not recorded as monetary payments. Given the information provided: Total revenue (TR) = $3 million Explicit costs (EC) = $2 million Implicit costs (IC) = $0
02

Calculate Accounting Profit

Accounting profit (AP) is calculated as total revenue minus explicit costs: AP = TR – EC AP = \(3 million – \)2 million AP = $1 million
03

Calculate Economic Profit

Economic profit (EP) is calculated as total revenue minus both explicit and implicit costs: EP = TR – (EC + IC) EP = \(3 million – (\)2 million + $0) EP = $1 million
04

Match Results to the Multiple-Choice Options

Both accounting profit and economic profit are equal to $1 million for this firm. This matches option c: c) an accounting profit and an economic profit of $1 million

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Most popular questions from this chapter

Which statement is true? (LO2) a) Accounting profits are greater than economic profits. b) Economic profits are greater than accounting profits. c) Accounting profits are equal to economic profits.

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