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1. The reason economists assume that firms try to maximize economic profit is that:
a. firms that don't earn profits will, over time, have difficulty securing financing to survive.
b. firms in the real world always maximize profit.
c. profit is easier to calculate than revenue.
d. if a firm fails to earn a profit in its first year, it will go out of business.
e. profit maximization is easier for firms than revenue maximization.
ANSWER: a
FEEDBACK: a. Correct. Firms try to earn a profit by transforming resources into salable products.
Over time, only profitable firms survive in the market. See 7-1: Cost and Profit
b. Incorrect. Firms try to earn a profit by transforming resources into salable
products. Over time, only profitable firms survive in the market. See 7-1: Cost and
Profit
c. Incorrect. Firms try to earn a profit by transforming resources into salable
products. Over time, only profitable firms survive in the market. See 7-1: Cost and
Profit
d. Incorrect. Firms try to earn a profit by transforming resources into salable
products. Over time, only profitable firms survive in the market. See 7-1: Cost and
Profit
e. Incorrect. Firms try to earn a profit by transforming resources into salable
products. Over time, only profitable firms survive in the market. See 7-1: Cost and
Profit
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Analytic - Communication Abilities
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Remember
5. Cash payments for steel to be used in the production process would be an example of _____.
a. sunk costs
b. fixed costs
c. explicit costs
d. implicit costs
e. entrepreneurial costs
ANSWER: c
FEEDBACK: a. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
b. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
c. Correct. A firm’s explicit costs are its actual cash payments for resources: wages,
rent, interest, insurance, taxes, and the like. Implicit costs are the opportunity
costs of using resources owned by the firm or provided by the firm’s owners. See
7-1: Cost and Profit
d. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
e. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Analytic - Communication Abilities
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Understand
6. A firm's opportunity costs of using resources provided by the firm's owners are called _____.
a. sunk costs
b. fixed costs
c. explicit costs
d. implicit costs
e. entrepreneurial costs
ANSWER: d
11. John moved his office from a building he was renting downtown to the carriage house he owns behind his house.
Which of the following statements shows how his costs change?
a. Both his explicit and implicit costs will rise.
b. His explicit costs will rise, while his implicit costs will fall.
c. Both his explicit and implicit costs will fall.
d. His explicit costs fall, while his implicit costs will rise.
e. His explicit costs will rise, while his implicit costs will remain the same.
ANSWER: d
FEEDBACK: a. Incorrect. Explicit costs are actual cash payments for resources, while implicit
costs are the opportunity costs of using resources owned by a firm. See 7-1: Cost
and Profit
b. Incorrect. Explicit costs are actual cash payments for resources, while implicit
costs are the opportunity costs of using resources owned by a firm. See 7-1: Cost
and Profit
c. Incorrect. Explicit costs are actual cash payments for resources, while implicit
costs are the opportunity costs of using resources owned by a firm. See 7-1: Cost
Copyright Cengage Learning. Powered by Cognero. Page 6
and Profit
d. Correct. Explicit costs are actual cash payments for resources, while implicit costs
are the opportunity costs of using resources owned by a firm. See 7-1: Cost and
Profit
e. Incorrect. Explicit costs are actual cash payments for resources, while implicit
costs are the opportunity costs of using resources owned by a firm. See 7-1: Cost
and Profit
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
12. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays
$20,000 a year, and take over a building that he owns and currently rents to his brother for $6,000 a year. His expenses at
the sushi bar would be $50,000 for food and $2,000 for gas and electricity. The chef’s explicit costs are equal to_____.
a. $26,000
b. $66,000
c. $78,000
d. $52,000
e. $72,000
ANSWER: d
FEEDBACK: a. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
b. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
c. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
d. Correct. A firm’s explicit costs are its actual cash payments for resources: wages,
rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
e. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
13. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays
$20,000 a year, and take over a storage building that he owns and currently rents to his brother for $6,000 a year. His
expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. The chef’s implicit costs are equal
to _____.
a. $26,000
b. $66,000
c. $78,000
Copyright Cengage Learning. Powered by Cognero. Page 7
d. $52,000
e. $72,000
ANSWER: a
FEEDBACK: a. Correct. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
b. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
c. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
d. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
e. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
14. Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday and receives a
wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips. Which of the
following represents an implicit cost of operating the bar?
a. Diane's wages
b. Sam's time
c. Diane's tips
d. Sam's tips
e. Both Diane's and Sam's tips
ANSWER: b
FEEDBACK: a. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
b. Correct. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
c. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
d. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
e. Incorrect. Implicit costs are the opportunity costs of using resources owned by the
firm or provided by the firm’s owners. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
15. Maryann and Don want to open their own deli. To do so, Maryann must give up her job, where she earns $20,000 per
Copyright Cengage Learning. Powered by Cognero. Page 8
year, and Don must give up his part-time job, where he earns $10,000 per year. They must liquidate their money market
fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and the expenses of such
necessities as utilities, corned beef, and pickles are $35,000 annually. _____ is the explicit cost per year of operating the
deli.
a. $10,000
b. $35,000
c. $45,000
d. $31,000
e. $76,000
ANSWER: c
FEEDBACK: a. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
b. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
c. Correct. A firm’s explicit costs are its actual cash payments for resources: wages,
rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
d. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
e. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
16. Amanda, age 6, opens a lemonade stand. She makes all the lemonade from a mix she found in her parents' pantry. Her
stand is an old box she found in the garage. The pitcher and paper cups were taken from the kitchen. Which of the
following is true?
a. The opportunity cost of the lemonade is zero.
b. The only opportunity cost of the lemonade is Amanda's time.
c. Amanda's explicit costs are zero.
d. The implicit costs of Amanda's lemonade are zero.
e. Whatever revenue Amanda gets will be pure economic profit.
ANSWER: c
FEEDBACK: a. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
b. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
c. Correct. A firm’s explicit costs are its actual cash payments for resources: wages,
rent, interest, insurance, taxes, and the like. Implicit costs are the opportunity
costs of using resources owned by the firm or provided by the firm’s owners. See
7-1: Cost and Profit
d. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
Copyright Cengage Learning. Powered by Cognero. Page 9
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
e. Incorrect. A firm’s explicit costs are its actual cash payments for resources:
wages, rent, interest, insurance, taxes, and the like. Implicit costs are the
opportunity costs of using resources owned by the firm or provided by the firm’s
owners. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
17. Which of the following would not appear on a firm's accounting statement?
a. Sunk costs
b. Fixed costs
c. Explicit costs
d. Implicit costs
e. Insurance costs
ANSWER: d
FEEDBACK: a. Incorrect. Implicit costs require no cash payment and no entry in the firm’s
accounting statement. See 7-1: Cost and Profit
b. Incorrect. Implicit costs require no cash payment and no entry in the firm’s
accounting statement. See 7-1: Cost and Profit
c. Incorrect. Implicit costs require no cash payment and no entry in the firm’s
accounting statement. See 7-1: Cost and Profit
d. Correct. Implicit costs require no cash payment and no entry in the firm’s
accounting statement. See 7-1: Cost and Profit
e. Incorrect. Implicit costs require no cash payment and no entry in the firm’s
accounting statement. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Analytic - Communication Abilities
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Understand
19. The difference between a firm's total revenue and what must be paid to attract resources from their best alternative use
is called _____.
a. total revenue
b. utility
c. economic profit
d. cost
e. production efficiency
ANSWER: c
FEEDBACK: a. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
b. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
c. Correct. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
d. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
e. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Analytic - Communication Abilities
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Understand
24. Maryann and Don want to open their own deli. To do so, Maryann must give up her job, where she earns $20,000 per
year, and Don must give up his part-time job, where he earns $10,000 per year. They must liquidate their money market
fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and the expenses of such
necessities as utilities, corned beef, and pickles are $35,000 annually. The minimum amount of revenue per year that
would make it worthwhile, financially, for Maryann and Don to run the deli is _____.
a. $10,000
b. $35,000
c. $45,000
d. $31,000
e. $76,000
ANSWER: e
FEEDBACK: a. Incorrect. To make running the deli worthwhile, the deli has to cover its explicit
and implicit costs. See 7-1: Cost and Profit
b. Incorrect. To make running the deli worthwhile, the deli has to cover its explicit
and implicit costs. See 7-1: Cost and Profit
c. Incorrect. To make running the deli worthwhile, the deli has to cover its explicit
and implicit costs. See 7-1: Cost and Profit
d. Incorrect. To make running the deli worthwhile, the deli has to cover its explicit
and implicit costs. See 7-1: Cost and Profit
e. Correct. To make running the deli worthwhile, the deli has to cover its explicit and
implicit costs. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
25. Suppose Ernie gives up his job as financial advisor for P.E.T.S., where he earned $30,000 per year, to open up a store
selling pet-care products. He invested $10,000 in the store, which were originally savings that earned 5 percent interest.
This year, the revenue from the new business was $50,000 and the explicit costs were $10,000. The accounting profit
earned by Ernie was _____.
a. $10,000
b. $50,000
c. $20,000
d. $40,000
e. $9,500
ANSWER: d
FEEDBACK: a. Incorrect. Accounting profit equals total revenue minus explicit costs. See 7-1:
Cost and Profit
b. Incorrect. Accounting profit equals total revenue minus explicit costs. See 7-1:
Cost and Profit
c. Incorrect. Accounting profit equals total revenue minus explicit costs. See 7-1:
Cost and Profit
d. Correct. Accounting profit equals total revenue minus explicit costs. See 7-1: Cost
and Profit
26. Suppose Ernie gives up his job as financial advisor for P.E.T.S., where he earned $30,000 per year, to open up a store
selling pet-care products. He invested $10,000 in the store, which were originally savings that earned 5 percent interest.
This year, the revenue from the new business was $50,000 and the explicit costs were $10,000. The economic profit
earned by Ernie was _____.
a. $10,000
b. $50,000
c. $20,000
d. $40,000
e. $9,500
ANSWER: e
FEEDBACK: a. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
b. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
c. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
d. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
e. Correct. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
31. Suppose Ben buys out Jerry's ownership in a firm but retains him as a salaried employee. Jerry gets a salary equal to
the value of the share that he held in the firm. In this case, which of the following statements is true?
a. The firm’s economic profit increases.
b. The firm’s economic profit decreases.
c. There is no change in the economic profit of the firm.
d. There is no change in the accounting profit of the firm.
33. Suppose a soccer coach has been making $25,000 per year but gives up his coaching job in order to make soccer
shoes. If his revenue from the sale of these shoes is $50,000 and his materials cost $20,000, then his economic profit is
equal to _____.
a. $5,000
b. $25,000
c. $30,000
d. $50,000
e. $80,000
ANSWER: a
FEEDBACK: a. Correct. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
b. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
c. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
d. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
e. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
34. Suppose Bob leaves his $50,000-a-year job as a financial advisor to P.E.T.S. and starts his own business selling pet-
care products. In the first year, his accounting profit is $70,000. Based on this level of success, Bob should:
a. return to his old job because his economic profit is negative.
b. return to his old job because his economic profit is smaller than his accounting profit.
c. return to his old job because his economic profit is less than his old salary.
d. stay with his new firm because his economic profit is positive.
e. stay with his new firm because accounting profit is positive.
ANSWER: d
FEEDBACK: a. Incorrect. A firm can continue producing as long as its economic profit is positive.
Economic profit can be calculated as accounting profit minus implicit costs. See
7-1: Cost and Profit
b. Incorrect. A firm can continue producing as long as its economic profit is positive.
Economic profit can be calculated as accounting profit minus implicit costs. See
7-1: Cost and Profit
Copyright Cengage Learning. Powered by Cognero. Page 19
c. Incorrect. A firm can continue producing as long as its economic profit is positive.
Economic profit can be calculated as accounting profit minus implicit costs. See
7-1: Cost and Profit
d. Correct. A firm can continue producing as long as its economic profit is positive.
Economic profit can be calculated as accounting profit minus implicit costs. See
7-1: Cost and Profit
e. Incorrect. A firm can continue producing as long as its economic profit is positive.
Economic profit can be calculated as accounting profit minus implicit costs. See
7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
35. Suppose a lawyer leaves his $50,000-a-year job and starts his own firm breeding pit bulls. In the first year, his
accounting profit is $70,000. The lawyer finances his new business with $100,000 from his savings account, which had
earned 10 percent interest. From his new business, the lawyer earns an economic profit of _____.
a. $10,000
b. $60,000
c. $70,000
d. −$80,000
e. −$90,000
ANSWER: a
FEEDBACK: a. Correct. Economic profit equals total revenue minus all costs, both implicit and
explicit. Economic profit can also be calculated as accounting profit minus implicit
costs. See 7-1: Cost and Profit
b. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. Economic profit can also be calculated as accounting profit minus implicit
costs. See 7-1: Cost and Profit
c. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. Economic profit can also be calculated as accounting profit minus implicit
costs. See 7-1: Cost and Profit
d. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. Economic profit can also be calculated as accounting profit minus implicit
costs. See 7-1: Cost and Profit
e. Incorrect. Economic profit equals total revenue minus all costs, both implicit and
explicit. Economic profit can also be calculated as accounting profit minus implicit
costs. See 7-1: Cost and Profit
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: MICR.MCEACH.17.07.01 - Distinguish the three types of profit and explain what each
reflects
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
TOPICS: Cost and Profit
KEYWORDS: Bloom's: Apply
36. If a pizza joint earns only a normal profit this year, its: