Essay about Answers to End-of Chapter Questions and Exercises

3230 Words Nov 10th, 2014 13 Pages
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
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Accounting profit = $25 million; economic loss = –$5 million c. Accounting profit = $10 million; economic loss = –$10 million d. Accounting loss = –$25,000; economic loss = –$75,000

4. (Alternative Measures of Profit) Why is it reasonable to think of normal profit as a type of cost to the firm?

Recall that firms produce output using four kinds of resources—natural resources, labor, capital, and entrepreneurial ability. The owner of the firm supplies some of the resources that the firm employs. Normal profit is the return to the entrepreneurial ability and other resources supplied by the firm’s owners. If this profit is not as large as those individuals could earn in their best alternative situation, they will switch the resources to that alternative. So, we can think of normal profit as being the minimum return, or cost, that is necessary to keep the firm running.

5. (Short Run Versus Long Run) What distinguishes a firm’s short run period from its long run period?

In the short run, at least one of the firm’s resources is fixed, usually the size of the firm. In the long run, all the resources are variable. That is, the quantities of all resources can change to alter the firm’s level of output, including the size of the firm.

6. (Law of Diminishing Marginal Returns) As a farmer, you must decide how many times during the year to plant a new crop. Also, you