Course Name: Managerial Economics

Individual Assignment One and Two

Briefly explain the following questions (your answer to each question should be provided in
hand written form)

1. Kebede is the owner of a small grocery store in a busy section of Addis Ababa, Ethiopia.
Kebede’s annual revenue is $200,000 and his total explicit cost (Kebede pays himself an
annual salary of $30,000) is $180,000 per year. A supermarket chain wants to hire Adam as
its general manager for $60,000 per year.

Answer:https://www.assignmentexpert.com/homeworkanswers/economics/macroeconomics/
question-139300 link used to find answer

A. What is the opportunity cost to Kebede of owning and managing the grocery store?
B. What is Kebede’s accounting profit?
C. What is Kebede’s economic profit?
2. The opportunity cost of any decision includes the value of all relevant sacrifices, both
explicit and implicit. Do you agree? Explain.

Answer; opportunity costs represent the benefits an individual, investor or business misses out
on when choosing one alternative over another. Yes, I agree with that.

But I don’t quite understand what you mean by “sacrifices”. They are all “options” or
opportunities that you can choose from. I can say that when choosing one option, I will have to
sacrifice other relevant options or values. But still it is your choice. You must have weighed the
risks and benefits of implementing your strategies to realize short-term and long-term goals to
make this decision.

What I mean is that you must be far-sighted enough to predict what would happen when you
choose one option over the others. You should foresee that more benefits could possibly be
obtained in the long run, although you may lose something when foregoing one opportunity in
order to get the another goal in the short-term. Therefore, you should consider each explicit and
implicit factors, be familiar with the advantages and disadvantages of each alternative and
analysis the risks and benefits of each choice before making your final decision.

Yes, relevant sacrifices could be explicit and/or implicit. For example, you choose to invest stock
market over updating the equipment to improve your business since you think that the former
choice can bring you more return at present. But you should understand that letting the
equipment falling behind would greatly hinder the productivity of your business. This is one of
the explicit sacrifices and there are also other obvious losses such as tedious and cumbersome
work, resentment from employees, losses of talented worker, etc. There are also implicit
sacrifices for the worker such as low cognitive skills in operating equipment, narrow minded
heart and even backward thinking pattern. As we all agree that working with advanced
equipment would liberate workers from the routine monotonous tasks and have more time to
think and engage in work related to innovation and creativity. A business with lagging-behind
equipment and a workforce with low capabilities will be the biggest loss for an enterprise.

Making investment on stock market and making lots of money would have to serve the business
in return. It is related to the goal of your business. Everything that you do and every decision that
you make should be around the final GOAL(s) of your business. Making money is only one of
the goals although it is a main goal. Setting up a high-efficient workplace and a happy and
capable workforce should be another important goal for most business, I think. Short-term
goal(s) should be consistent with and serve for long-term goal(s). Short-term benefits must bring
more long-term benefits. We should be flexible enough to grasp the current main problem and
solve it in order to reclaim a road to go forward faster and further.

3. The “law of demand” is not a law. Do you agree with this statement? Explain
4. Many owners of small businesses do not pay themselves a salary. What effect will this
practice have on the calculation of the firm’s accounting profit? Economic profit? Explain.

It will affect the business account since the owner of the business might start spending the
cash belonging to the business for personal use, leading to a deficit in the accounting profit
and capital.
5. Firms that earn zero economic profit should close their doors and seek alternative
investment opportunities. Do you agree? Explain.
 An economic profit of zero is also known as a normal profit. Despite earning an
economic profit of zero, the firm may still be earning a positive accounting profit.
 Zero economic profit is also known as normal profit. Like economic profit, this figure also
accounts for explicit and implicit costs. When a company makes a normal profit, its costs
are equal to its revenue, resulting in no economic profit. Competitive companies whose
total expenses are covered by their total revenue end up earning zero economic profit.
Zero accounting profit, though, means that a company is running at a loss. This means that
its expenses are higher than its revenue.
 An economic profit in the short run attracts competitor firms in perfectly competitive
market. It will cause a fall in prices. Economic losses will cause firms to exit the market and
prices will rise.
  In the long-run, competitive markets earn zero economic profit. The existence of economic
profit in a particular industry attracts new firm in the industry in the long run due to which
profit falls and firms continue to enter the industry until economic profit falls to zero.
No because as they cover fixed cost I advise to operate until their profit covers fixed
6. Suppose that the total market demand for a product comprises the demand of three
individuals with identical demand equations. QD, 1= QD, 2=QD, 3=50-25P

What is the market demand equation for this product?

7. The market demand and supply equations for a product are where Q is quantity and P is
price. What are the equilibrium price and quantity for this product
QD =25-3P
QS =10+2P

Where Q is quantity and P is price. What are the equilibrium price and quantity for this product?

8. The market supply and demand equations for a given product are given by the expressions
QD =200-50P
QS = - 40 + 30P
A. Determine the equilibrium price and quantity.
B. Suppose that there is an increase in demand to
QD =300-50P
Suppose further that there is an increase in supply to
QS =-20+30P
What are the new equilibrium price and quantity?
C. Suppose that the increase in supply had been
QS = 140 + 30P
Given the demand curve in part b, what are the equilibrium price and quantity?
Diagram your results. A link used to explain a diagram.https://www.toppr.com/ask/question/suppose-
the-demand-and-supply-curves-of-salt-are-given-by/
9. Define and give an example of each of the following demand terms and concepts. Illustrate
diagrammatically a change in each.
A. Quantity demanded
B. Demand
C. Substitute good
D. Complementary good
E. Income expectation (high and low)
10. Does the following statement violate the law of demand? The quantity demanded of
diamonds declines as the price of diamonds declines because the prestige associated with
owning diamonds also declines.

A link used to EXPLAIN Veblen Goods https://www.toppr.com/guides/business-economics/theory-of-

demand/exceptions-to-the-law-of-demand/

11. At a price of $25, the quantity demanded of good X is 500 units. Suppose that the price
elasticity of demand is -1.85. If the price of the good increases to $26, what will be the new
quantity demanded of this good?

12. Briefly explain the determinants of price elasticity of demand?

13. For each of the following production functions, determine whether returns to scale are
decreasing, constant, or increasing when capital and labor inputs are increased from K = L =
1 to K = L = 2. (Explain your answers)

https://www.assignmentexpert.com/homework-answers/economics/economics-of-enterprise/
question-147354 , link used to explain the following question.
14. Define each of the following (Support your answer with the necessary graph)
A. Stage I of production
B. Stage II of production
C. Stage III of production
15. What it meant by
A. Short run in production
B. Long run in production
16. Suppose that output is a function of labor and capital. Assume that labor is the variable input
and capital is the fixed input. Explain the law of diminishing marginal product. How is the
law of diminishing marginal product reflected in the total product of labor curve?
17. Briefly explain the following concepts related to isoquant curve
A. What does a linear isoquant illustrate?
B. Isoquants cannot intersect. Do you agree? Explain.
18. Suppose that the total cost function of a firm is given as
https://www.toppr.com/guides/business-economics/theory-of-cost/short-run-average-costs/
https://www.economicsdiscussion.net/cost-curves/shapes-of-various-short-run-cost-curves-
with-diagram/16912
https://homework.study.com/explanation/if-your-estimated-total-cost-function-is-tc-100-
plus-10q-plus-0-02q-2-then-at-q-1000-marginal-cost-is-mc-blank-a-110-b-50-c-70-d-
90.html

A. Determine the output level that minimizes average total cost (ATC). At this output
level, what is TC? ATC? MC? Verify that at this output level MC = ATC, and that
ATC intersects MC from below.
B. Determine the output level that minimizes average variable cost (AVC). At this
output level, what is TC? AVC? MC?
C. Diagram your answers to parts a and b.
19. Explain the following concepts (support your answer with the necessary graph)
A. Expansion path
B. Economies of scale
https://corporatefinanceinstitute.com/resources/economics/economies-of-scale/ a
link used explain economies of scale
20. Suppose that a perfectly competitive industry comprises 1,000 identical firms. Suppose,
further, that the market demand (QD) and supply (QS) functions are
QD =170,000,000-10,000,000P
QS =70,000,000+15,000,000P
A. Calculate the equilibrium market price and quantity?
B. Given your answer to part a, how much output will be produced by each firm in
the industry?
C. Suppose that one of the firms in the industry goes out of business. What will be the
effect on the equilibrium market price and quantity?
21. Firms in perfectly competitive industries may be described as price takers. What are the
implications of this observation for the price and output decisions of profit-maximizing
firms?
22. Briefly explain the difference and similarity between the four types of market structure
(perfectly competitive, monopolistically competitive, oligopoly and monopoly)
23. Briefly explain the six basic steps of decision making?
24. Briefly explain the following concepts:
A. Managerial economics
B. Opportunity cost
C. Explicit and implicit cost
D. Economic and Accounting cost
25. Explain approaches used to measure national income?
A. Gross Domestic Product (GDP)
B. Gross National Product (GNP)
C. Discuss approach used to measure GNP/GDP
 Explicit & implicit cost
 Imagine that you left a job that paid $100,000 per year to start a company as a sole proprietorship, and at
the end of the year your company brought in $200,000 and had expenses of $150,000. Did you make a
profit? It seems like a straightforward question, but the answer depends on who you ask! An accountant
would say you brought in $200,000 and spent $150,000, so you made a profit of $50,000! But look what
you had to turn down. Did you know that accountants and economists have two distinctly different
definitions of profit? Well they do! Which one matters most to you? Which one do you think matters most
to firms? Read on to find out more about them.

Overview of Types of Profit in Economics

 Most firms want to make a profit, among other things. But arguably, most of these other things are
aimed at increasing profit, so let’s focus on profit. So, what is profit? Profit is all the money made
by the firm minus all the money spent by the firm. Let’s look at the standard definition of profit in
economics.
 Profit refers to the total revenue (TR) of the firm minus the total production cost (TC) of the firm.

 The definition of profit mentions total revenue and total production cost. What are these? The total
revenue is all the money acquired from selling the firm’s products at a given price. Total cost, on the other
hand, refers to all the costs incurred during production.

 Total revenue is the price (P) of a product multiplied by the quantity (Q) of that product sold.
 Total cost is the sum of all costs incurred by the use of the factors of production to produce the product.
 As mentioned in the definition of total revenue, price refers to the monetary value for which the product
is sold, whereas quantity refers to the number of units of the product sold by the firm.
 Now, you should keep in the back of your mind that there are two types of profit. These are accounting
profit and economic profit. To help you understand the distinction between the two, let’s look at implicit
and explicit costs, which are the two types of costs.

EXAMPLE

 A student graduates from the university with a degree. This student can choose to either enter the

university’s master’s degree program or find a job. The student then decides to enter the master’s degree
program. This decision, if acted upon, comes with an opportunity cost, and opportunity cost includes the
benefits forgone by choosing an alternative.

 First, there is an explicit cost, which refers to the amount of money paid directly as fees for enrolling in

the master’s program.

 An explicit cost is a cost that involves an outlay of money.
 Second, there is an implicit cost, which refers to the amount of money the student would
have made by finding a job instead of continuing school.

 An implicit cost is the monetary value of the benefits that have been forgone by choosing an alternative.

 Types of Profit: Accounting Profit vs. Economic Profit

 Let’s consider the example of a coffee processing company to understand the different
types of profit.
 A coffee processing company made total revenue of $20,000 this year. The company
owns all its equipment and spent a total of $10,000 to produce the coffee it sold this year.
Based on the explicit costs, the company made a profit of $10,000.
 An accountant does not stop there. An accountant subtracts an extra amount for
depreciation of the machinery and equipment. Depreciation is a real cost because the
equipment are not as good as new once they are used, although it's not an explicit cost.
 Depreciation is the reduction in the value of equipment as a result of being used over
time.
 From this, we can now see that accounting profit considers both explicit costs and
depreciation.
 Accounting profit refers to the total revenue minus the total explicit costs and total
depreciation.
 This means the accounting profit of the coffee processing company is
 For economic profit, looking at the same example, if the coffee processing company
contemplates whether to keep running the business or open another business,
opportunity cost comes into the picture. This is because the company must consider the
total revenue, the implicit costs, and the explicit costs.
 Implicit costs can include opportunity cost not just of the equipment or machinery, but
also of the founder's time. Implicit costs can also include the cost of incurring risk, since
starting up a new company can be very risky.
 When economists use the term “profit”, they are referring to economic profit.
 Economic profit refers to the total revenue minus the total explicit costs and total
implicit costs of the firm.
 Economic profit is different from accounting profit because the accounting profit does
not consider the implicit costs incurred by the business. Thus, generally speaking, the
inclusion of implicit costs will make the economic costs higher than the accounting cost.
As a result, economic profit is usually lower than accounting profit.
 Why is implicit cost important? Because there is a limited amount of resources, and the
decision to own equipment or even operate a given business means that the firm does not
have enough resources to operate other businesses (where there are other benefits).
 Looking at this, it becomes clear that the firm actually responds to economic profit, rather
than accounting profit. This is because when there are alternatives, the company must
make sure that it is putting its resources into the best alternative. Look at the example
below.
 A coffee processing plant can either sell processed coffee or raw coffee. Processed coffee
sells for $40 a bag, and raw coffee sells for $10 a bag. It costs $15 to process the coffee,
which means the firm will gain $25 from this. The company is presented with two
alternatives - to sell raw coffee and gain $10 or sell processed coffee and gain $25. if it
sells raw coffee, that means it will miss out on the extra $15 of profit from selling
processed coffee. Firms want to make as much money as they can get, therefore, the firm
will respond to the economic profit of selling raw coffee. The firm will then sell
processed coffee instead.
 Types of Profit: Definition of Normal Profit
 There is another term that economics use, and it is normal profit. A firm makes a normal
profit when the firm's economic profit is zero, and the firm is just breaking even.
Economists tend to believe that in the long run, due to competitive pressures, firms can
only make a normal profit and no more.
 Normal profit is when the economic profit of the firm is equal to zero.
 We know firms want to make more money than they spend. However, a profit of zero is
not necessarily bad. This is because for the economic profit to be zero, the accounting
profit is likely positive. Only when the opportunity cost of using the firm's resources
elsewhere are included, does the firm have normal profit. This means that the firm is
putting its resources to the best possible use at that particular time.
 Types of Profit: Formula for Economic Profit
 So, what is the formula for economic profit? Economic profit considers the total
revenue, implicit cost, and explicit cost in the following formula:

 Types of Profit: Economic Profit Calculation
 Let’s calculate economic profit from the example below using the formula:
 A coffee processing company made total revenue of $20,000 this year. The company
owns all its equipment and spent a total of $10,000 to produce the coffee it sold this year.
 The company would have gained extra revenue of $5,000 by renting equipment instead of
owning them.
 In this example, the total revenue is $20,000, explicit cost is $10,000, and implicit cost is
$5,000.
 Therefore,
 Types of Profit: Accounting Profit Formula
 Accounting profit looks at the total revenue, the explicit cost, and depreciation. So,
what is the formula for accounting profit? It is as follows:

 Let’s calculate accounting profit from the example below using this formula.
 A coffee processing company made total revenue of $20,000 this year. The company
owns all its equipment and spent a total of $10,000 to produce the coffee it sold this year.
As the company used its equipment, the machinery dropped in value by $2,000 due to
wear and tear.
 In this example, the total revenue is $20,000, explicit cost is $10,000, and depreciation is
$2,000.
 Therefore,

Types of Profit: Economic Profit and Accounting Profit

Examples
Economic profit is the total profit after taking out all costs of production and all the benefits
forgone by not using the firm’s resources for alternative purposes. For example, a corn
processing company subtracts the cost of processing and packing the corn as well as the benefit it
would have gained by choosing to process an alternative product.

Accounting profit, on the other hand, is the total profit after taking out all costs of production and
depreciation on equipment. For example, if that same corn processing company uses processing
machinery that it owns, rather than rents, then those machines reduce in value after one year of
use. This reduction in value is then taken into consideration as depreciation when calculating
accounting profit for the corn processing company.

Congrats! You have reached the end of this article. To know the things firms spend on as part of
production costs, read our article on Factor Markets.

Types of Profit - Key Takeaways

 Profit refers to the total revenue of a firm minus the total costs incurred during production.
 An explicit cost is anything that involves an outlay of money. An implicit cost is the monetary
value of the benefits that have been forgone by choosing an alternative.
 There are two types of profit: accounting profit and economic profit.
 Accounting profit is total revenue minus explicit costs and depreciation.
 Economic profit is total revenue minus explicit costs and implicit costs.
 Normal profit is when economic profit equals zero.
Frequently Asked Questions about Types of Profit
The types of profit are accounting profit and economic profit.

Economists view profits as including both implicit and explicit costs. Specifically, economists
care about the opportunity costs of resources--the next best option. Opportunity costs are implicit
costs, so they are included in economic profit but not in accounting profit, which only includes
explicit costs and depreciation.

Normal profit is when the economic profit equals zero.

Accounting profit considers explicit costs and depreciation whereas economic profit considers
explicit costs and implicit costs. Since economic profit includes opportunity cost, which is an
implicit cost, accounting profit is often be higher than economic profit.

If you lend your friend $100 for a year and your friend pays you back $110 at the end of the year,
you have an accounting profit of $10, but if you could have earned 20% by leaving this $100 in
the bank, then your economic profit was a loss of $10! Economic profit includes opportunity cost
which is an implicit cost.

Types of Profit: Economic Profit and Accounting Profit Examples

Economic profit is the total profit after taking out all costs of production and all the benefits
forgone by not using the firm’s resources for alternative purposes. For example, a corn
processing company subtracts the cost of processing and packing the corn as well as the benefit it
would have gained by choosing to process an alternative product.

Accounting profit, on the other hand, is the total profit after taking out all costs of production and
depreciation on equipment. For example, if that same corn processing company uses processing
machinery that it owns, rather than rents, then those machines reduce in value after one year of
use. This reduction in value is then taken into consideration as depreciation when calculating
accounting profit for the corn processing company.

Congrats! You have reached the end of this article. To know the things firms spend on as part of
production costs, read our article on Factor Markets.

Types of Profit - Key Takeaways

Profit refers to the total revenue of a firm minus the total costs incurred during production.

An explicit cost is anything that involves an outlay of money. An implicit cost is the monetary
value of the benefits that have been forgone by choosing an alternative.

There are two types of profit: accounting profit and economic profit.

Accounting profit is total revenue minus explicit costs and depreciation.

 Economic profit is total revenue minus explicit costs and implicit costs.

Normal profit is when economic profit equals zero.

Frequently Asked Questions about Types of Profit

The types of profit are accounting profit and economic profit.

Economists view profits as including both implicit and explicit costs. Specifically, economists
care about the opportunity costs of resources--the next best option. Opportunity costs are implicit
costs, so they are included in economic profit but not in accounting profit, which only includes
explicit costs and depreciation.

Normal profit is when the economic profit equals zero.

Accounting profit considers explicit costs and depreciation whereas economic profit considers
explicit costs and implicit costs. Since economic profit includes opportunity cost, which is an
implicit cost, accounting profit is often be higher than economic profit.

If you lend your friend $100 for a year and your friend pays you back $110 at the end of the year,
you have an accounting profit of $10, but if you could have earned 20% by leaving this $100 in
the bank, then your economic profit was a loss of $10! Economic profit includes opportunity cost
which is an implicit cost.

 https://www.coursehero.com/study-guides/boundless-economics/economic-profit/