534 section 10 Behind the Supply Curve: Profit, Production, and Costs
But what about an economic profit equal tozero? Most of us would generally think
earning zero profit was a bad thing. After all, a firm’s goal is to maximize profit—profit
is what firms are after! However, an economic profit equal to zero is not bad at all. An
economic profit of zero means that the firm could not do any better using its resources
in any alternative activity. Another name for an economic profit of zero is a normal
profit.A firm earning a normal profit is earning just enough to keep it using its re-
sources in its current activity. After all, it can’t do any better in any other activity!An economic profit equal to zero is also
known as a normal profit.It is an economic
profit just high enough to keep a firm
engaged in its current activity.
Module 52 AP Review
Check Your Understanding
- Karma and Don run a furniture-refinishing business from their
home. Which of the following represent an explicit cost of the
business and which represent an implicit cost?
a. supplies such as paint stripper, varnish, polish, sandpaper,
and so on
b. basement space that has been converted into a workroom
c. wages paid to a part-time helper
d. a van that they inherited and use only for transporting
furniture
e. the job at a larger furniture restorer that Karma gave up in
order to run the business- a. Suppose you are in business earning an accounting profit
of $25,000. What is your economic profit if the implicit
cost of your capital is $2,000 and the opportunity cost of
your time is $23,000? Explain your answer.
b. What does your answer to part a tell you about the
advisability of devoting your time and capital to this business?
Solutions appear at the back of the book.
Tackle the Test: Multiple-Choice Questions
- Which of the following is an example of an implicitcost of going
out for lunch?
a. the amount of the tip you leave the waiter
b. the total bill you charge to your credit card
c. the cost of gas to drive to the restaurant
d. the value of the time you spent eating lunch
e. all of the above
2.Which of the following is an implicitcost of attending college?
a. tuition
b. books
c. laptop computer
d. lab fees
e. forgone salary
- Which of the following is the best definition of accounting
profit? Accounting profit equals total revenue minus
depreciation and total
a. explicit cost only.
b. implicit cost only.
c. explicit cost plus implicit cost.
d. opportunity cost.
e. explicit cost plus opportunity cost.
4.Which of the following is considered when calculating
economic profit but not accounting profit?
a. implicit cost
b. explicit cost
c. total revenue
d. marginal cost
e. All of the above are considered when calculating accounting
profit.- You sell T-shirts at your school’s football games. Each shirt
costs $5 to make and sells for $10. Each game lasts two hours
and you sell 100 shirts per game. You could always be earning
$8 per hour at your other job. Which of the following is correct?
Your accounting profit from selling shirts at a game is
a. $1,000 and your economic profit is $500.
b. $500 and your economic profit is $1,000.
c. $500 and your economic profit is $484.
d.$484 and your economic profit is $500.
e. $500 and your economic profit is also $500.