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Occupational Health and Safety, Canadian Edition

15th Edition
by David L. Goetsch, University of West Florida and Oskaloosa-Walton Eugene Ozon, Algonquin College
1035 Solutions 49 Chapters 1470 Studied ISBN: 0133450244 Computer Science 5 (1)

Chapters 16: DQ 10

10. How do the concepts of accounting profit and economic profit differ? Why is economic profit smaller than accounting profit? What are the three basic sources of economic profit? Classify each of the following according to those sources:

a. A firm’s profit from developing and patenting a new medication that greatly reduces cholesterol and thus diminishes the likelihood of heart disease and stroke.

b. A restaurant’s profit that results from the completion of a new highway past its door.

c. The profit received by a firm due to an unanticipated change in consumer tastes.


Step-By-Step Solution

10. How do the concepts of accounting profit and economic profit differ? Why is economic profit smaller than accounting profit? What are the three basic sources of economic profit? Classify each of the following according to those sources:

a. A firm’s profit from developing and patenting a new medication that greatly reduces cholesterol and thus diminishes the likelihood of heart disease and stroke.

b. A restaurant’s profit that results from the completion of a new highway past its door.

c. The profit received by a firm due to an unanticipated change in consumer tastes.

Answer: Accounting profit is what remains of a firm’s total revenues after it has paid for all the factors of production employed by the firm (its explicit costs) but not for the use of the resources owned by the business itself. Economists also take into consideration implicit costs—the payment the owners could have received by using the resources they own in some other way. The economist adds these implicit costs to the accountant’s explicit costs to arrive at total cost. Subtracting the total cost from total revenue results in a smaller profit (the economic profit) than the accountant’s profit.

Sources of economic profit: (1) creating popular new products; (2) reduce production costs below rivals' costs; and (3) create and maintain a profitable monopoly.

a. Profit from creating a popular new product, as well as monopoly profit from the patent.

b. Creating and maintaining a monopoly as a result of its locational advantage.

c. Profit from creating a popular 'new' product. Note here that the change in consumer preferences has made the good 'popular'. The term 'new' is relative, it may have been around for awhile but people just did not want to buy it in the quantities they now do.


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