Unit 3 Assignment u03a1 - Economic Problems
Chapter 9, Discussion Question 2, p. 21
2. Distinguish between accounting profit, economic profit, and normal profit. Does accounting profit or economic profit determine how entrepreneurs allocate resources between different business ventures? Explain.
Accounting profit is the profit that would appear on your accounting statement that you would report to the government for tax purposes.
Economic profit is the result of subtracting all of your economic costs from revenue. By subtracting all of your economic costs for your revenue, you determine how your current business venture compares with your best alternative business venture.
Normal profit is the typical amount of accounting profit that you would most likely have earned in another business venture. This number is what you would use to figure out the economic profit.
The accounting profit overstates the economic success of your business because it ignores your implicit costs. The economic profit, on the other hand, does not ignore these nor the explicit costs. It is for this reason entrepreneurs would focus on economic profits rather than accounting profits to allocate resources between different business ventures.
Chapter 9, Problem 3 on p. 219
3. You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $500,000 per month, and you have contractual labor obligations of $1 million per month that you can’t get out of. You also have a marginal printing cost of $0.25 per paper as well as a marginal delivery cost of $0.10 per paper. If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month, what happens to the AFC per paper, the MC per paper, and the minimum amount that you must charge to break even on these costs?