Question

Chapter 10

1) What is the difference between a normal profit and an economic profit?

2) What is an incentive system?

3) What is the principal-agent problem as applied to corporations? What are the three major ways that corporations can cope with the principal-agent problem?

Answer 1

Answer to first question is provided :

1) Normal profit = Total Revenue - Explicit costs - Implicit costs . Explicit costs are accounting costs or costs incurred to run the enterprise but implicit costs are opportunity costs or costs incurred by forgoing the next best alternative . Normal profit is the minimum amount required to keep a firm running . A firm earns normal profit or zero economic profit at break-even point .

If the amount earned is greater than a normal profit, it is called an economic profit; if less, then it is called an economic loss . Economic profit is calculated using same formula . But the result will not be zero . it will either be positive or negative .