Question

1- Suppose a firm produces 200,000 units a year and sells them for $10 each.  The explicit costs of production are $1,500,000 and the implicit costs are $300,000.  What is the firm's accounting profit or loss?  What is the firm’s economic profit or loss?  Explain.

2.  In the situation above, would you expect firms to seek to enter or leave the industry?  Under what condition would you expect firms neither to seek entry to, nor exit from, the industry?  Might this condition be viewed as “industry equilibrium?”  Explain.

Answer 1

Sales Revenue = 200000*10 = 2,000,000

Explicit Cost = 1,500,000

Implicit Cost = 300,00

The firm's accounting profit = Sales Revenue - Explicit Cost = 2,000,000 - 1,500,000 =500, 000

The firm's economic profit = Sales Revenue - Explicit Cost - Implicit Cost = 2,000,000 - 1,500,000 - 300,000 =200, 000

In this situation the firm would continue operations. More firms are likely to enter the industry. The condition under which firms neither enter nor exit is the situation in the long run when firm is just able to cover all of its total costs and it breaks even. That is total revenue equals total cost of production. The price equals average cost of production is another way to look at it.