Question

1. A firm pays $310,000 in rent, interest and wages. The firm's entrepreneur could earn $90,000 in another business. The firm's revenues are $420,000. What are the firm's normal profit, economic cost and economic profit?

A. 20,000 normal profit, 310,000 economic cost and 90,000 economic profit

B. 90,000 normal profit, 400,000 economic cost and 20,000 economic profit

C. 110,000 normal profit, 400,000 economic cost and 0 economic profit

D. none of these

2. Assume the following cost for a firm: $600 labor, $300 equipment and $200 materials. The firm owns the building and does not pay rent which would be $900. a. what is the total accounting cost? b. what is the total economic cost? c. if the company sold the building and leased it back at $900, what would the change in accounting and economic cost be?

A. $2,000, $1,100, $0/$900

B. $1,100, $2000, $900/$0

C. $2,000, $2000, $0/$0

D. none of these

Answer 1

Question 1

The firm's entrepreneur could earn $90,000 in the another business.

Thus, $90,000 is the opportunity cost of running the current business.

Normal profit is the opportunity cost of running business. It is also an implicit cost.

So,

The firm's normal profit is $90,000.

Economic cost = Expenditure on rent, interest, and wages + Implicit cost

Economic cost = $310,000 + $90,000 = $400,000

The economic cost is $400,000.

Economic profit = Total revenue - Economic cost

Economic profit = $420,000 - $400,000

Economic profit = $20,000

The economic profit is $20,000.

Hence, the correct answer is the option (B).