Homework 7.1 Explicit and Implicit Costs, and Accounting and Economic Profit

The price a firm charges for a good, the output produced, and labor employed are all dependent upon __________. cost conditions weather conditions media perception production conditions

-cost conditions -production conditions Production involves a number of important decisions that define a firm's behavior. These decisions include, but are not limited to: What product or products should the firm produce? How should the firm produce the products (i.e., what production process should the firm use)? How much output should the firm produce? What price should the firm charge for its products? How much labor should the firm employ?

At the end of the year, after taxes, a manufacturing firm has $230,000 in revenues, $90,000 in production costs, and $140,000 in opportunity costs. How much economic profit did the firm make?

0 When a manufacturing firm ends its year with an accounting profit equal to its production costs and opportunity costs combined, this is referred to as earning zero economic profits. Economic Profit=Total Revenues−Explicit Cost−Implict Cost If Total Revenues=Explicit Cost+Implict Cost then Economic Profit>0

Susan works for a large marketing firm where she earns $120,000 per year. Susan wants to quit her job and start her own marketing firm. She estimates that her total costs on direct business expenses will be $30,000. Susan will quit her job and start her own marketing firm only if she can earn $25,000 in economic profit. What is the minimum total revenue Susan must be able to earn for her to quit her job?

175,000 Economic Profit = Total Revenue - Explicit Costs - Implicit Costs Total Revenue = X because this is what Susan wants to find out. It is the variable in this problem. Explicit Costs = $30,000. This is because explicit costs are the money payments spent on inputs. Susan expects to spend $30,000 on direct business expenses. Implicit Costs = $120,000. Susan's implicit cost is the salary foregone by starting her own marketing company. In this case, if Susan quits her job then she will give up the opportunity to earn $120,000. Economic Profit = $25,000 $25,000=X−$30,000−$120,000 therefore X=$175,000. Susan must be able to earn a minimum of $175,000 in total revenue for her to consider quitting her job.

Bob's Tire Company has earned $500,000 of revenue this year. The company has a rental payment of $3,000 per month, insurance payments of $1500 per quarter, and Bob pays himself a yearly salary of $80,000. What is Bob's Tire Company's accounting profit this year?

378,000 Accounting profit is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. For Bob's Tire Company, the company brought in $500,000 in revenues but paid out money for explicit expenses. Rent for the year is $36,000 ($3,000 × 12= $36,000). Insurance for the year is $6,000 ($1500 × 4=$6,000), and Bob's salary is $80,000. The total explicit costs are $122,000. Therefore the total accounting profit is,

True or false?Profit is found by subtracting operating costs from total revenue.

False Each business, regardless of size or complexity, tries to earn a profit: Profit=Total Revenue−Total Cost

Alina has decided to follow her passion opening a dance studio to teach ballet lessons. She will be taking a pay cut to follow her dream. She makes an annual salary of $175,000 as a stock broker, but expects to only earn $80,000 a year teaching dance. To run her business, she will need to lease a space, purchase a dance floor and mirrors, hire a secretary, and and pay for some advertising. The studio lease will cost her $18,000 annually, a dance floor and mirrors cost $11,000, and advertising is $800. She expects to pay a part-time secretary $20,000 a year. What is the total amount for Alina's explicit expenses?

To open her studio, Alina will have to rent a studio space, purchase the dance floor and mirrors, hire a secretary, and pay for advertising. All of these costs are explicit costs of opening her own business. Quitting her job and making less money annually is an implicit cost. To get the total amount of explicit costs, add them together. In this case, Explicit Costs=$18,000+$11,000+$800+$20,000 Explicit Costs=$49,800

A cost paid out of pocket is an ______ cost. Select the correct answer below: direct explicit implicit accounting

explicit

True or false?If the production process for a product is too costly, a firm can choose to shut down production.

true