Distinguish between implicit and explicit costs and give examples of each. In addition, explain how explicit and implicit costs affect the distinction between economic profit and accounting profit
What explains the distinction between the two measures of profit?
Explicit costs are those that a firm pays out of pocket, i.e., for which monetary payments are made. In contrast, implicit costs are the opportunity of resources owned by the firm that are used in production but for which no explicit monetary payment is made. Examples of implicit costs include the cost of energy (electricity and natural gas) and payments made for labor services. Examples of implicit costs include the amount of money the owner of a firm could earn in his next best opportunity and the amount of rent the owner could receive from a building that he owns and uses in his own business. Generally speaking, accounting profit is calculated as the difference between total revenues and total explicit costs. In contrast, economic profit is calculated as the difference between total revenues and the sum of explicit and implicit costs.
Accounting profit is calculated to facilitate the determination of tax liabilities. Economic profit is concerned with the net return after all opportunity costs are accounted for.
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Assume that policy makers are pursuing a fixed exchange rate regime. Assume that the economy is initially operating at the natural level (i.e., Y = Yn). Suppose fiscal policy makers increase taxes. This fiscal contraction will cause which of the following?
A) The real exchange rate will be permanently higher in the medium run. B) The real exchange rate will be permanently lower in the medium run. C) The effects of this devaluation on the real exchange rate will be ambiguous in the medium run. D) The real exchange rate will be unchanged in the medium run. E) none of the above
Which of the following statements represents a correct and sequentially accurate economic explanation?
A) The (U.S.) dollar appreciates, net exports rise, total expenditures on goods and services rises, AD rises, and the AD curve shifts rightward. B) The interest rate falls, investment rises, total expenditures on goods and services rises, AD falls, and the AD curve shifts leftward. C) Wealth increases, consumption rises, total expenditures on goods and services rises, AD falls, and the AD curve shifts rightward. D) (Business) expectations about future sales become more positive, investment rises, total expenditures on goods and services rises, AD rises, and the AD curve shifts rightward. E) Foreign real national income rises, net exports rise, total expenditures on goods and services falls, AD rises, and the AD curve shifts rightward.