Principles of Microeconomics In Class Questions on Economic versus Accounting Profits Medium Stakes Assignment Worth 21 points Question One Assume that Betty runs her own tax consulting business. Assume that her yearly revenue from her business is equal to $750,000. Assume her only explicit cost is the salaries she pays to the workers she hires-the total of all the salaries equals $400,000 a year. Assume that if Betty wasn't running her own consulting business that she could be working for a public accounting firm earning $350,000 a year. (a) What is Betty's economic profit equal to? (b) Suppose we are keeping track of Betty's bank account over a year. If she runs her consulting business what will be the total inflows into her account, her total outflows, and her net income? If she quits her consulting business what now will be reflected in her checking account? (c) Respond to the following assertion: "If price was equal to cost then no one would want to sell anything because you don't make any money when price is equal to cost." NOTE: the correct response to this assertion Involves correctly defining cost. Question Two Assume that Betty runs her own tax consulting business. Assume that her yearly revenue from her business is equal to $1,000,000. Assume her only explicit cost is the salaries she pays to the workers she hires-the total of all the salaries equals $400,000 a year. Assume that if Betty wasn't running her own consulting business that she could be working for a public accounting firm earning $350,000 a year. a) What is Betty's economic profit equal to? b) Suppose we are keeping track of Betty's bank account over a year. If she runs her consulting business what will be the total inflows into her account, her total outflows, and her net income? If she quits her consulting business what now will be reflected in her checking account? (c) There is someone else who if we calculated that person's economic profit we would find that it was negative. Who is that person? (d) Over time will other people try to come into this business? Why or why not? Question Three Assume that Betty runs her own tax consulting business. Assume that her yearly revenue from her business is equal to $750,000. Assume her only explicit cost is the salaries she pays to the workers she hires-the total of all the salaries equals $400,000 a year. Assume that if Betty wasn't running her own consulting business that she could be working for a public accounting firm earning $600,000 a year. (a) What is Betty's economic profit equal to? (b) Suppose we are keeping track of Betty's bank account over a year. If she runs her consulting business what will be the total inflows into her account, her total outflows, and her net income? If she quits her consulting business what now will be reflected in her checking account? (c) If all Betty cares about is her financial return what would we expect she should do? Explain. (d) Respond to the following assertion: If economic profit is negative it means that person isn't making any money
