Page 576 - Krugmans Economics for AP Text Book_Neat

But what about an economic profit equal to zero? Most of us would generally think
An economic profit equal to zero is also
earning zero profit was a bad thing. After all, a firm’s goal is to maximize profit—profit
known as a normal profit. It is an economic
is what firms are after! However, an economic profit equal to zero is not bad at all. An
profit just high enough to keep a firm
engaged in its current activity. economic profit of zero means that the firm could not do any better using its resources
in any alternative activity. Another name for an economic profit of zero is a normal
profit. A firm earning a normal profit is earning just enough to keep it using its re-
sources in its current activity. After all, it can’t do any better in any other activity!

Module 52 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Karma and Don run a furniture-refinishing business from their e. the job at a larger furniture restorer that Karma gave up in
home. Which of the following represent an explicit cost of the order to run the business
business and which represent an implicit cost?
2. a. Suppose you are in business earning an accounting profit
a. supplies such as paint stripper, varnish, polish, sandpaper,
of $25,000. What is your economic profit if the implicit
and so on
cost of your capital is $2,000 and the opportunity cost of
b. basement space that has been converted into a workroom
your time is $23,000? Explain your answer.
c. wages paid to a part-time helper
b. What does your answer to part a tell you about the
d. a van that they inherited and use only for transporting
advisability of devoting your time and capital to this business?
furniture
Tackle the Test: Multiple-Choice Questions

1. Which of the following is an example of an implicit cost of going 4. Which of the following is considered when calculating
out for lunch? economic profit but not accounting profit?
a. the amount of the tip you leave the waiter a. implicit cost
b. the total bill you charge to your credit card b. explicit cost
c. the cost of gas to drive to the restaurant c. total revenue
d. the value of the time you spent eating lunch d. marginal cost
e. all of the above e. All of the above are considered when calculating accounting
profit.
2. Which of the following is an implicit cost of attending college?
a. tuition 5. You sell T-shirts at your school’s football games. Each shirt
b. books costs $5 to make and sells for $10. Each game lasts two hours
c. laptop computer and you sell 100 shirts per game. You could always be earning
d. lab fees $8 per hour at your other job. Which of the following is correct?
e. forgone salary Your accounting profit from selling shirts at a game is
a. $1,000 and your economic profit is $500.
3. Which of the following is the best definition of accounting
b. $500 and your economic profit is $1,000.
profit? Accounting profit equals total revenue minus
c. $500 and your economic profit is $484.
depreciation and total
d. $484 and your economic profit is $500.
a. explicit cost only.
e. $500 and your economic profit is also $500.
b. implicit cost only.
c. explicit cost plus implicit cost.
d. opportunity cost.
e. explicit cost plus opportunity cost.

534 section 10 Behind the Supply Curve: Profit, Production, and Costs