Suppose that a company is making zero economic profit. Which one of the followin
ID: 1163390 • Letter: S
Question
Suppose that a company is making zero economic profit. Which one of the following statements must be true? O Its economic profit is greater than its accounting profit. O Its accounting profit equals its cost of equity capital. Its accounting profit is less than its cost of equity capital. O Its accounting profit equals its economic profit. Why do newspapers, financial statements, and annual reports usually report a company's accounting profit but not its economic profit? Because economic profit tends to overstate a company's earnings. O Because economic profit is always negative, which reflects negatively on the company. O Because economic profit can only be presented with complex graphs and equations. O Because economic profit reflects opportunity costs, which differ among investors. The table given below shows the total revenue and total cost of producing a commodity. Table 22.1 Total Revenue $0 $1,700 $3,300 $4,800 $6,200 $7,500 $8,700 $9,800 $10,800 $11,700 Total Cost $1,000 $2,000 $2,800 $3,500 $4,000 4,500 $5,200 $6,000 $7,000 $9,000 Total Output 2 4 6 8 9 In Table 22.1, marginal revenue exceeds marginal cost: O a. until the fifth unit of output. O b. at all units of output. O c. up to the eighth unit of output. O d. up to the seventh unit of output. O e. until the sixth unit of output.Explanation / Answer
1) Suppose that a company is making a zero economic profit. Which one of the following statements must be true?
Solution: its accounting profit equals to its cost of equity capital
Explanation:
Economic profit = total revenue - (explicit costs + implicit costs); or
total revenue = explicit costs + implicit costs
Accounting profit = Total Revenue - Explicit Costs
Accounting profit = Implicit cost
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2) Why do newspaper, finacial statements, and annual reports usually report a company's accounting profit but not it's accounting profit
Solution: Because economic profit reflects opportunity costs, which differ among investors
Explanation: Since the cost of equity capital is very hard to measure, and opportunity costs differ from investor to investor thus do not usually report economic profits on income statements and balance sheets.
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3) In Table 22.1, marginal revenue exceeds marginal cost
Solution: up to the seventh unit of output.
Explanation:
Total output
Total revenue
Marginal Revenue
Total cost
Marginal cost
MR-MC
0
0
1000
1
1700
1700
2000
1000
700
2
3300
1600
2800
800
800
3
4800
1500
3500
700
800
4
6200
1400
4000
500
900
5
7500
1300
4500
500
800
6
8700
1200
5200
700
500
7
9800
1100
6000
800
300
8
10800
1000
7000
1000
0
9
11700
900
9000
2000
-1100
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4) Refer to table 22.1 if we assume that Holmes is currentky serving 8 clients, then Homes agency
Solution: could increase profits by serving less clients
Explanation: Holmes could increase profits with serving less clients
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Total output
Total revenue
Marginal Revenue
Total cost
Marginal cost
MR-MC
0
0
1000
1
1700
1700
2000
1000
700
2
3300
1600
2800
800
800
3
4800
1500
3500
700
800
4
6200
1400
4000
500
900
5
7500
1300
4500
500
800
6
8700
1200
5200
700
500
7
9800
1100
6000
800
300
8
10800
1000
7000
1000
0
9
11700
900
9000
2000
-1100
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