ANSWERS TO End-of chapter QUESTIONS AND exercises
Answers to Questions for Review
1. (Explicit and Implicit Costs) Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not?

Amos McCoy is not currently making an economic profit, despite the fact that he is making an accounting profit. This is so, because the accounting profit calculation does not take into account an important implicit cost—the opportunity cost of not raising soybeans. Actually, McCoy is experiencing an economic loss. According to our theory, he should get out of the corn business and begin growing soybeans. This question highlights the important distinction between accounting profit and economic profit.

2. (Explicit and Implicit Costs) Determine whether each of the following is an explicit cost or an implicit cost: a) Payments for labor purchased in the labor market b) A firm’s use of a warehouse that it owns and could rent to another firm c) Rent paid for the use of a warehouse not owned by the firm d) The wages that owners could earn if they did not work for themselves

a) explicit; b) implicit; c) explicit; d) implicit

3. (Alternative Measures of Profit) Calculate the accounting profit or loss as well as the economic profit or loss in each of the following situations: a. A firm with total revenues of $150 million, explicit cost of $90 million, and implicit costs of $40 million b. A firm with total revenues of $125 million, explicit cost of $100 million, and implicit costs of $30 million c. A firm with total revenues of $100 million, explicit cost of $90 million, and implicit costs of $20 million d. A firm with total