Question

economists normally assume that the goal of a typical business (firm) is to
(x) sell as much of their product as possible regardless of the level of profit.
(y) set the price of their product as high as possible regardless of the level of profit.
(z) maximize profit regardless of the price or quantity of sales.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Which of the following statements about profit is (are) correct?
(x) Profit is defined as total revenue minus total cost
(y) Accounting profit is equal to total revenue minus the implicit cost of producing a good.
(z) In order to compute economic profit, the economist must include both explicit and implicit costs in the calculation of total costs.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Which of the following statements is (are) correct?
(x) Although implicit costs are important costs for a firm, they do not require an outlay of money by the firm.
(y) The lost opportunity to invest in other capital markets when the money is invested in one's business is an important implicit cost of almost every business.
(z) A business owner forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm is an implicit cost
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Answer 1

Ans) 1) The goal of any firm is to maximise profit. They then tend to adjust the price or quantity or both according to it.

Only statement z is correct. Option e.

2) Profit = total revenue - total cost

Explicit cost are the direct payments made and they have dollar value attached to it. Eg- wages, rent, salaries, utilities and taxes etc.

Implicit costs are the opportunity cost or the trade off made. They are indirect cost. Eg- the rent of your own building that you could have earned by renting it rather utilizing it for your own business.

Accounting profit includes only implicit cost. But an economists sees it differently and hence economic costs include both implicit and explicit cost.

Accounting profit = total revenue - explicit cost

Economic profit = total revenue - (implicit + explicit cost)

Statements x and z are correct. Option c is correct.

3) According to above explanation, all the statements are correct.

Option a