Profits

Question 1

What is economic profit?

Answer 1

Economic profit = total revenue - economic costs

Economic profits may be positive, zero, or negative.

Question 2

What is abnormal profit?

Answer 2

Positive economic profit, arising when total revenue is greater than economic costs

Question 3

What is normal profit?

Answer 3

Zero economic profit, arising when total revenue is equal to economic costs. It is the minimum amount of revenue that the firm must receive so as to cover both explicit and implicit costs

Question 4

What is loss?

Answer 4

Negative economic profit, arising when total revenue is less than economic costs

Question 5

What is profit maximization?

Answer 5

Profit maximization involves determining the level of output that the firm should produce to make profit (or loss) as large (or small) as possible.

Question 6

What are the two methods used to maximize profits?

Answer 6

1. TR-TC method

2. MR = MC method

Question 7

Why does MC = MR represent the profit maximizing quantity?

Answer 7

1. For MR > MC, when output increases by one unit, the additional revenue gained will be greater than the additional cost (firm should increase its output)
2. For MC > MR, when output increases by one unit, the additional revenue gained will be lesser than the additional cost