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Module 52Defining ProfitMAIN IDEA(s) Identify clear main ideas or purposes1. ?What is the difference between implicit and explicit costs, and their importance to decision making?2. ?What are the different types of profit, including economic profit, accounting profit, and normal profit?3. ?How do economists calculate profit?SUPPORTING DETAILS ?Locate and interpret details. Understand the function of a part of a passage. Understanding Profit4. ?What is the most basic way to calculate profit?Explicit vs. Implicit Costs5. ?What is the difference between an explicit and implicit cost?6. ?Why are implicit costs part of economic analysis?Accounting Profit vs. Economic Profit7. What is the difference between economic profit and accounting profit?8. ?Review Table 52.2. ?What is the difference between Case 1 and Case 2? ?Normal Profit9. ?What is the difference between a positive and negative ECONOMIC profit?10. ?What is another name for an economic profit of zero? ?SEQUENTIAL, COMPARATIVE, & CAUSE-EFFECT RELATIONSHIPSOrder sequences of events. Understand the subtleties in relationships between people, ideas, and concepts. Understand implied, subtle, or complex cause-effect relationships.11. ?A firm’s profit is equal to (a)_________________ minus (b)________________.12. ?The difference between accounting profit and economic profit is that accounting profit considers only (c)_______________ costs.13. ?The opportunity cost of capital is called the (d)______________ cost of capital.14. ?An economic profit of zero is also called a(n) (e)_______________ profit. ?When a firm is earning an economic profit of zero, the firm (f) will/will not stay in that business.MEANING OF WORDSDetermine the appropriate meaning of context-dependent words, phrases, or statements.15. ?Explicit Cost16. ?Implicit Cost17. ?Accounting Profit18. ?Economic Profit19. ?Implicit Cost of Capital20. ?Normal ProfitGENERALIZATIONS AND CONCLUSIONSDraw generalizations and conclusions about people, ideas, and variables. ?21. ?It is important for a business to consider their implicit costs because...22. ?Economic profit is more difficult to achieve then accounting profit because...____1.Jacquelyn is a student at a major state university. Which of the following is an example of an implicit cost of her attending college?a.tuitionb.textbooksc.the salary that she could have earned working full-puter lab feese.a calculator for her calculus class.____2.The implicit cost of capital is:a.the expense associated with leasing machines.b.the expense associated with buying machines.c.the opportunity cost of capital used by a business.d.irrelevant for determining economic profit.e.the interest rate paid to the bank on loans.____3.Suppose the Chicago Cubs could rent out Wrigley Field (the field the players play on) to local youth leagues for $11,000 per month. The $11,000 per month reflects the ________ of capital.a.implicit costb.explicit costc.direct costd.total coste.average fixed cost____4.In central Florida, the demand for real estate has been increasing rapidly for years. This reality, in combination with occasional freezes that kill orange trees, has led many orange grove owners to sell their land to real estate developers. Because of the freezes and land demand, the ________ cost of capital is ________ in central Florida's orange groves.a.explicit; decreasingb.implicit; increasingc.implicit; decreasingd.explicit; increasinge.total; decreasing____5.Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando. Sarah's husband—an economist—claims Sarah lost $43,002 running her pottery studio. This means her husband is claiming that she incurred ________ in ________ costs.a.$86,004; implicitb.$43,002; implicitc.$43,002; explicitd.$86,004; explicite.$0; explicit____6.If economic profit for a firm is negative:a.the firm should exit the industry in the long run.b.accounting profit must also be negative.c.the firm should stay in business so long as accounting profit is positive.d.the firm will not owe any taxes to the government.e.the firm is earning a normal profit.____7.During its only year of operation, a firm collected $175,000 in revenue and spent $50,000 on raw materials, labor, and utilities. The owners of the firm spent $100,000 of their own money to build the firm's factory (instead of buying bonds and earning a 10% rate of return), which they sold at the end of the year for $100,000. The firm's economic profit is:a.$35,000.b.$125,000.c.$100,000.d.$25,000.e.$115,000.____8.Until recently Rosemarie worked as an accountant, earning $30,000 annually. Then she inherited a piece of commercial real estate that had been renting for $12,000 annually. Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is:a.$230,000.b.$30,000.c.$0.d.-$42,000.e.-$12,000.____9.George owns a gun range in Texas. He pays $32,000 per year in insurance, $408,000 in wages, $23,000 in supplies, and he forgoes $32,000 per year he could make as a police officer. His total revenue last year equaled $460,000. That means his economic ________ equaled ________.a.profit; $3,000b.losses; $3,000c.losses; $35,000d.profit; $35,000e.losses; $25,000____10.Part of the ________ associated with the Chicago Cubs baseball team is the value of batting cages.a.laborb.landc.capitald.entrepreneurshipe.natural resources____11.Charges that must be paid for the use of factors of production such as labor and capital are:a.explicit costs.b.accounting profits.c.implicit costs.d.economic profitse.normal profits.____12.Bessie wants to calculate the accounting and economic profits on her cattle farm in Nebraska. She pays $30,000 per year for the cost of raising cattle, $80,000 in wages, $20,000 in insurance, and she forgoes $30,000 per year that she could make as a teacher. If her total revenue equals $140,000, that means her accounting profit is ________ and her economic profit is ________.a.$10,000; -$20,000b.$30,000; -$30,000c.-$10,000; -$10,000d.$60,000; $30,000e.$10,000; - $30,000____13.The implicit cost of capital is:a.the explicit cost of capital that the firm might have used but didn't need to.b.the same as depreciation.c.the opportunity cost of using personal savings, rather than borrowing, to finance the firm.d.the cost of human capital.e.the opportunity cost of the capital used by a business.____14.Suppose a local floral shop has explicit costs of $200,000 per year and implicit costs of $50,000 per year. If the store earned an economic profit of $50,000 last year, this means that the store's accounting profit equaled:a.$10,000.b.$50,000.c.$100,000.d.$200,000.e.$100,000.____15.The dormitories of Eastland College represent part of its:a.land.b.labor.c.capital.d.explicit costs.e.entrepreneurship.____16.Suppose Eastland College does not hold summer classes but could rent out the campus to various summer sports camps for $100,000. The potential revenue of the summer camps represents a(n):a.normal profit.b.explicit cost.c.total cost.d.sunk cost.e.implicit cost of capital.____17.Which of the following is true of the relationship between accounting profit and economic profit?a.Economic profit is less than accounting profit if implicit costs exist.b.Economic profit is always equal to accounting profit.c.Economic profit is greater than accounting profit if implicit costs exist.d.Economic profit is less than accounting profit if implicit costs are zero.e.Economic profit is positive when accounting profit is negative.____18.Bill is a political consultant with his own firm. He travels the country and provides campaign advice for political candidates. Last year he earned $250,000 in revenue for his services. He pays one employee $50,000 to manage the small office back home and pays $25,000 on rent and utilities for that office. Bill owns computing and office equipment that depreciated by $5,000 last year. His accountant tells him that if he were to sell all of the equipment, he could put that money in the bank and earn $3,000 in interest next year. A few years ago Bill received a standing offer to teach political science at a college at a salary of $100,000. Bill's accounting profit is equal to ________ and his economic profit is equal to ________.a.$175,000; $67,000b.$170,000; $67,000c.$200,000; $72,000d.$170,000; $70,000e.$175,000; $72,000____19.Profit computed using explicit costs as the only measure of costs is:a.explicit profit.b.normal profit.c.implicit profit.d.economic profit.e.accounting profit.____20.When machinery experiences wear and tear from usage, this is often referred to as:a.depreciation.b.rental costs.c.accounting profits.d.marginal costs.e.variable costs. ................
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