Question

15. Refer to the above data. What level of total utility is realized from the equilibrium combination of Jand if the consumer has a money income of $52 and the prices of J and K are 58 and 54 respectively? A. 156 utils B. 124 utils C. 276 utils D. 36 utils 16. Which of the following definitions is correct? A. Accounting profit + economic profit = normal profit. B. Economic profit - accounting profit - explicit costs. C. Economic profit - accounting profit - implicit costs. D. Economic profit - implicit costs - accounting profits. The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building - $22,000 Annual revenue from operations - $380.000 Payments to workers - $120,000 Utilities (electricity, water, disposal) costs - $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity - $80,000 Entrepreneur's forgone interest on personal funds used to finance the business $6,000 230,000 50 94,000 380,000 - 8000 230 000 - 6ooo - 120000 50000 - 22000 Poooo

Answer 1

16 C.

Economic profit= Accounting Profit- Implicit costs.

Economic profit is total revenue minus (explicit costs + implicit costs). Implicit costs do not require actual monetary payments. Implicit costs are opportunity costs. Opportunity cost is the value of the next best alternative.

Explicit costs are those that require monetary payments like rent, salary, repairs etc.

Implicit cost.

Accounting Profit

Revenue= $380,000

Explicit cost

Annual lease=         $22,000.

Payments to workers=$120,000.

Utility bills=$8,000

                                           --------------

Total explicit cost=       $150,000.

Accounting profit= revenue – explicit cost

= $380,000 - $150,000=$230,000.

Implicit cost

Interest foregone= $6,000

Value of entrepreneurs talent foregone =$80,000

Foregone salary=$50,000

Total implicit cost = $136,000

Economic profit= Revenue – Explicit cost+ Implicit cost

                             = $380,000 – ($150,000 + $136,000)

                            = $380,000-$286,000=$94,000.