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Question
Macroeconomics
Posted 5 months ago

When Yooko Industries makes 2000 widgets, the cost of producing a typical widget is $5\$ 5, which includes implicit costs of $2\$ 2.

What is Yooko Industries economic profit (or loss) and accounting profit (or loss) if the price of a widget is $4\$ 4 ?

Choose 1 answer:
(A) Economic profit =−$4000=-\$ 4000 (a loss);
Accounting profit =$2000=\$ 2000
(B) Economic profit =−$2000=-\$ 2000 (a loss);
Accounting profits =$2000=\$ 2000
(c) Economic profit =−$4000=-\$ 4000 (a loss);
Accounting profits =$4000=\$ 4000
(D) Economic profit =$4000=\$ 4000;
Accounting profits =$4000=\$ 4000
(E) Economic profit =$2000=\$ 2000;
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Answer from Sia
Posted 5 months ago
Solution
a
Calculation of Accounting Profit: Accounting profit is calculated by subtracting the explicit costs from the total revenue. The explicit cost per widget is 5−5 - 2 = 3forimplicitcosts,sothetotalexplicitcostfor2000widgetsis3 for implicit costs, so the total explicit cost for 2000 widgets is 3 \times 2000 = 6000.Thetotalrevenueisthepriceperwidgettimesthenumberofwidgets,whichis6000. The total revenue is the price per widget times the number of widgets, which is 4 \times 2000 = 8000.Therefore,theaccountingprofitis8000. Therefore, the accounting profit is 8000 - 6000=6000 = 2000
b
Calculation of Economic Profit: Economic profit takes into account both explicit and implicit costs. The total cost, including implicit costs, is 5perwidget,sofor2000widgets,itis5 per widget, so for 2000 widgets, it is 5 \times 2000 = 10000.Theeconomicprofitisthetotalrevenueminusthetotalcost(includingimplicitcosts),whichis10000. The economic profit is the total revenue minus the total cost (including implicit costs), which is 8000 - 10000=−10000 = -2000
Answer
Economic profit = -2000(aloss);Accountingprofit=2000 (a loss); Accounting profit = 2000
Key Concept
Economic vs. Accounting Profit
Explanation
Economic profit considers both explicit and implicit costs, while accounting profit considers only explicit costs. In this scenario, the economic profit is negative, indicating a loss when including implicit costs, whereas the accounting profit is positive, reflecting a gain when excluding implicit costs.

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