Q: What is the formula for economic profit?

$$\text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})$$

Question 1

Which of the following best describes economic rent?

Accepted Answer

A payment for the use of any resource over and above its opportunity cost.

Question 2

A famous athlete earns $$20 million per year, but would still play for 2 $$million. What is the economic rent in this scenario?

Accepted Answer

$18 million

Question 3

Which of the following is NOT an advantage of a proprietorship?

Accepted Answer

Unlimited liability

Question 4

Which business form allows owners to enjoy limited liability?

Accepted Answer

Corporation

Question 5

What is the formula for economic profit?

Accepted Answer

$$	ext{Economic Profit} = 	ext{Total Revenue} - (	ext{Explicit Costs} + 	ext{Implicit Costs})$$

Question 6

A firm has total revenues of $$500,000, explicit costs of 300$$,000, and implicit costs of $100,000. What is its economic profit?

Accepted Answer

$$100,000$$

Question 7

Which of the following is an implicit cost?

Accepted Answer

The opportunity cost of the owner's time

Question 8

If the nominal interest rate is 8% and the anticipated inflation rate is 3%, what is the real interest rate?

Accepted Answer

$$5\%$$

Question 9

What is the present value of $1,000 to be received in one year if the interest rate is 10%?

Accepted Answer

$$\909.09$

Question 10

Which of the following is a key function of the interest rate in the economy?

Accepted Answer

Allocating loanable funds to their highest-valued use

Question 11

Which of the following is a disadvantage of a partnership?

Accepted Answer

Each partner is subject to unlimited liability

Question 12

A corporation issues bonds to raise funds. What does this mean for the bondholder?

Accepted Answer

The bondholder is entitled to fixed annual payments and repayment of principal at maturity

Question 13

Which of the following best describes the theory of efficient markets?

Accepted Answer

All available information is fully incorporated into stock prices

Question 14

What is the main difference between common stock and preferred stock?

Accepted Answer

Common stock includes voting rights; preferred stock does not

Question 15

If a firm’s accounting profit is positive but its economic profit is zero, what does this imply?

Accepted Answer

The firm is covering all explicit and implicit costs, including opportunity costs

Question 16

Which of the following is NOT a main source of corporate funds?

Accepted Answer

Government grants

Question 17

A firm is considering an investment that will pay $$2,000 in two years. If the interest rate is 5%, what is the present value of this investment? (Use the formula PV$$ = \frac{FV}{(1 + r)^n}$)

Accepted Answer

$$\1$$,814.06$

Question 18

Which of the following statements about limited liability companies (LLCs) is correct?

Accepted Answer

LLCs combine the limited liability of corporations with the tax advantages of partnerships

Question 19

Why might a state government’s reduction in the interest rate used for discounted-present-value calculations increase the present value of future pension payments?

Accepted Answer

A lower discount rate increases the present value of future sums

Question 20

Which of the following is an example of inside information in financial markets?

Accepted Answer

Knowledge of a corporation’s upcoming merger before it is publicly announced

Rents, Profits, and the Financial Environment of Business: Microeconomics Study Notes

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