Question

Review profit and production of a firm by completing sections (a) through (c) that follow.

Compare accounting costs to economic costs. Which type/types of costs are paid in each method of determining profit? Explain.

What is normal profit? What is the return/payment to the entrepreneur if the firm (i) earns zero economic profit? (ii) earns positive economic profit? (iii) incurs economic losses? Explain each outcome.

Graphical present the three short run productivity curves (TP, MP, and AP). Explain where/how the three ranges of productivity affect each of the curves.

Answer 1

The economic cost is the monetary value of all resources employed in the course of business.It also refers to the opportunity cost of the inputs used in the enterprise.Economic cost also focus predominantly on implicit costs that the business incurs from the use of owned resources.A monetary value for the resources can be determined,but the resources are not paid for in monetary terms.

Accounting cost on the other hand,are based on explicit costs incurred by the business.Explicit costs are costs incurred in normal market transactions.Explicit costs are incurred in the purchase of productive resources.

• Economic profit =Accounting profit-Implicit costs.
• Accounting cost=Total revenues-Explicit cost

Normal profit:

Normal profit is an economic term that describes when ab firm's total revenue equal to its total cost in a perfectly competitive market.In Economics,normal profit is the minimum compensation that a firm receives for operating.It takes into consideration both explicit and implicit costs.It may be viewed in conjunction with economic profit.

If Economic profit is positive,There is incentive for firms to enter the market.

If Economic profit is negative,there is incentive for firms to exit the market.

If profit is zero,there is no incentive to enter or exit.

For a competitive market,economic profit can be positive in the short run.

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