Q: Which formula correctly represents accounting profit?

$$\text{Accounting Profit} = \text{Total Revenue} - \text{Explicit Costs}$$

Q: Which equation correctly represents economic profit?

$$\text{Economic Profit} = \text{Accounting Profit} - \text{Normal Profit}$$

Question 1

Which of the following best describes the difference between accounting profit and economic profit?

Accepted Answer

Accounting profit is calculated as total revenue minus explicit costs, while economic profit is total revenue minus both explicit and implicit costs.

Question 2

Sweet Treats Bakery earned $$60,000 in total revenue and incurred 38$$,000 in explicit costs and $12,000 in implicit costs. What is the economic profit?

Accepted Answer

$10,000

Question 3

If a firm in a perfectly competitive market is earning positive economic profit, what is the likely long-run outcome?

Accepted Answer

New firms will enter the market, increasing supply and driving economic profit to zero.

Question 4

Which formula correctly represents accounting profit?

Accepted Answer

$$	ext{Accounting Profit} = 	ext{Total Revenue} - 	ext{Explicit Costs}$$

Question 5

In the context of the bakery example, what does normal profit represent?

Accepted Answer

The minimum profit required to keep the owner in business, equal to implicit costs.

Question 6

Suppose the owner of Sweet Treats Bakery could have earned $$8,000 in another job and 4$$,000 in interest from savings. What are the implicit costs?

Accepted Answer

$12,000

Question 7

Which equation correctly represents economic profit?

Accepted Answer

$$	ext{Economic Profit} = 	ext{Accounting Profit} - 	ext{Normal Profit}$$

Question 8

What signal does a positive economic profit provide to businesses outside the industry?

Accepted Answer

It signals that there are profits to be made, encouraging entry into the market.

Question 9

Refer to the supply and demand graph with a shift in supply. What happens to equilibrium price and quantity when supply increases?

Accepted Answer

Equilibrium price decreases and equilibrium quantity increases.

Question 10

In the short run, a firm in a perfectly competitive market earns economic profit. What happens in the long run?

Accepted Answer

Economic profit is eliminated as new firms enter and supply increases.

Question 11

If the market price falls to the point where firms earn zero economic profit, what is this called?

Accepted Answer

Long-run equilibrium

Question 12

Which of the following is NOT an explicit cost for Sweet Treats Bakery?

Accepted Answer

Lost salary from quitting a job

Question 13

A bakery owner invests $$100,000 from a savings account earning 4$$,000 per year. What is the opportunity cost of this investment?

Accepted Answer

$4,000 per year

Question 14

Which of the following best describes the movement from short-run to long-run equilibrium in a perfectly competitive market?

Accepted Answer

Entry of new firms increases supply, lowering price and eliminating economic profit.

Question 15

If Sweet Treats Bakery earns zero economic profit, what does this imply about the owner's opportunity costs?

Accepted Answer

The owner is earning exactly enough to cover both explicit and implicit costs.

Question 16

Which of the following is a plausible reason for a firm to exit a perfectly competitive market in the long run?

Accepted Answer

The firm is consistently earning negative economic profit.

Question 17

Suppose the market supply curve shifts to the right. What is the most likely effect on the equilibrium price?

Accepted Answer

The equilibrium price will decrease.

Question 18

If a firm’s explicit costs are $$38,000 and its implicit costs are 12$$,000, and it earns $60,000 in total revenue, what is its normal profit?

Accepted Answer

$12,000

Question 19

Which of the following is an example of an implicit cost?

Accepted Answer

Foregone salary from another job

Question 20

In a perfectly competitive market, what happens to economic profit in the long run?

Accepted Answer

Economic profit tends toward zero as firms enter or exit the market.

Microeconomics Short Answer Guidance: Profit Calculations and Market Equilibrium

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