Microeconomics Quiz: Types Of Profit
20 questions · exam conditions
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Types Of ProfitQuestion 1 of 20

A consulting firm reports that for the past year, its total revenues were exactly equal to its total explicit costs. The founder, who also manages the firm, has a standing offer to work at a large corporation for a salary of $250,000 per year. Based on this information, the consulting firm is:

earning a normal profit, as it is covering all its explicit expenses.
earning zero economic profit because its accounting profit is zero.
incurring an economic loss of $250,000.
earning a positive accounting profit but an economic loss.
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Microeconomics Quiz

Microeconomics Quiz: Types Of Profit

Practice Types Of Profit in Microeconomics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Types Of Profit, giving you a quick way to practice the rules, question types, and explanations that matter most for Microeconomics.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A consulting firm reports that for the past year, its total revenues were exactly equal to its total explicit costs. The founder, who also manages the firm, has a standing offer to work at a large corporation for a salary of $250,000 per year. Based on this information, the consulting firm is:

  1. earning a normal profit, as it is covering all its explicit expenses.
  2. earning zero economic profit because its accounting profit is zero.
  3. incurring an economic loss of $250,000. (correct answer)
  4. earning a positive accounting profit but an economic loss.
Explanation: The statement that total revenues equal total explicit costs means that the accounting profit is exactly zero (TR - Explicit Costs = 0). Economic profit also accounts for implicit costs. The founder's forgone salary of $250,000 is an implicit cost. Therefore, the economic profit is the accounting profit minus the implicit costs: $0 - 250,000=−250,000 = -250,000. The firm is incurring a significant economic loss.

Question 2

A firm in perfect competition has an accounting profit of $50,000. The owner invested $300,000 of personal savings (opportunity cost 5% annually) and works full-time managing the business instead of earning $60,000 at another job. The firm also received a one-time government subsidy of $20,000 this year. What is the firm's normal profit?

  1. $0
  2. $75,000 (correct answer)
  3. $60,000
  4. $15,000
Explanation: Normal profit equals the total implicit costs that must be covered for the firm to remain in business long-term. This includes the opportunity cost of capital ($300,000 × 0.05 = 15,000)plustheopportunitycostoftheowner′stime(15,000) plus the opportunity cost of the owner's time (60,000). Normal profit = $15,000 + $60,000 = $75,000. The government subsidy and accounting profit are irrelevant to determining normal profit, which is solely the implicit costs. Choice A incorrectly suggests normal profit is zero. Choice C only includes the salary opportunity cost. Choice D only includes the capital opportunity cost.

Question 3

A technology startup has accounting profit of $200,000. The founder invested $1,000,000 of personal wealth (opportunity cost 7%) and works without salary, foregoing $120,000 annually. The company also holds patents worth $500,000 that could be licensed for $40,000 yearly. In a competitive market, what economic profit would signal the need for industry expansion?

  1. Any positive economic profit would signal expansion (correct answer)
  2. $230,000 to cover all opportunity costs plus provide normal return
  3. Zero economic profit indicates optimal industry size
  4. $160,000 to match explicit and implicit cost requirements
Explanation: In perfectly competitive markets, any positive economic profit indicates that firms are earning above-normal returns, which signals profit opportunities that will attract new entrants and lead to industry expansion. The current firm's economic profit calculation: implicit costs = $70,000 (investment opportunity cost) + $120,000 (salary opportunity cost) + $40,000 (licensing opportunity cost) = $230,000. Current economic profit = $200,000 - 230,000=−230,000 = -30,000. While this firm has negative economic profit, the question asks about the general principle: any positive economic profit in a competitive market signals expansion opportunities. Zero economic profit (Choice C) represents long-run equilibrium, not expansion conditions.

Question 4

Two identical firms operate in the same perfectly competitive market. Firm A is owned by an entrepreneur who gave up a $90,000 salary, while Firm B is owned by a retiree with no employment alternatives. Both firms have identical revenues of $300,000 and explicit costs of $180,000. What can be concluded about their profit situations?

  1. Both firms have identical economic profits of $120,000 since they face identical market conditions
  2. Firm A has higher accounting profit than Firm B due to lower opportunity costs
  3. Firm A has economic profit of $30,000 while Firm B has economic profit of $120,000
  4. Both firms have identical accounting profits, but Firm B has higher economic profit (correct answer)
Explanation: Accounting profit is the same for both firms: $300,000 - $180,000 = $120,000, since accounting profit only considers explicit costs. However, economic profit differs because implicit costs differ. Firm A's economic profit = $120,000 - $90,000 (foregone salary) = $30,000. Firm B's economic profit = $120,000 - $0 (no foregone salary) = $120,000. Therefore, both have identical accounting profits, but Firm B has higher economic profit. Choice A ignores the difference in implicit costs. Choice B incorrectly suggests accounting profit differs. Choice C correctly calculates Firm A's economic profit but matches the calculation shown in choice D.

Question 5

A farmer's accounting records show total revenue of $180,000 and total explicit costs of $120,000. The farmer owns land worth $400,000 that could be rented for $24,000 annually, and she forgoes a teaching salary of $55,000. If the farmer is just indifferent between continuing farming and pursuing alternatives, what must be her psychic income from farming?

  1. $19,000 (correct answer)
  2. $60,000
  3. $79,000
  4. $24,000
Explanation: If the farmer is indifferent between farming and alternatives, her total utility from farming equals her total utility from alternatives. Accounting profit from farming = $180,000 - $120,000 = $60,000. Monetary opportunity costs = $24,000 (rent) + $55,000 (salary) = $79,000. For indifference: Net benefit from farming = Net benefit from alternatives. Net benefit from farming = $60,000 + psychic income. Net benefit from alternatives = $79,000. Therefore: $60,000 + psychic income = $79,000, so psychic income = $19,000. Choice B shows only accounting profit. Choice C shows total opportunity costs. Choice D shows only the rental opportunity cost.

Question 6

In a perfectly competitive industry, firms are observed to be earning accounting profits that are significantly higher than the sum of the prevailing interest rate on invested capital and the average salaries for managers with similar skills. What is the most likely long-run consequence of this situation?

  1. Firms will collude to form a cartel and maintain these high profit levels.
  2. The industry is in long-run equilibrium because firms are profitable.
  3. New firms will enter the market, increasing market supply and lowering the price. (correct answer)
  4. Existing firms will exit the market due to the intense competitive pressure.
Explanation: The scenario describes a situation where accounting profits are greater than implicit costs (the opportunity cost of capital and labor). This means that firms are earning positive economic profits. In a perfectly competitive market, positive economic profits act as a signal that attracts new firms. The entry of new firms will increase the market supply, which in turn will drive down the market price, eroding the profits of all firms until economic profit returns to zero in the long run.

Question 7

Two firms, Firm A and Firm B, are in the same perfectly competitive industry. Firm A consistently earns positive economic profit, while Firm B earns zero economic profit. Which statement is most consistent with this situation?

  1. Firm A's accounting profit is greater than its implicit costs, while Firm B's is not. (correct answer)
  2. Firm B's accounting profit must be zero, while Firm A's is positive.
  3. Firm A must be charging a higher price than Firm B to achieve its higher profit.
  4. Firm B is likely to exit the market, while Firm A will remain.
Explanation: Economic Profit = Accounting Profit - Implicit Costs. For Firm A, Economic Profit > 0, which implies Accounting Profit - Implicit Costs > 0, or Accounting Profit > Implicit Costs. For Firm B, Economic Profit = 0, which implies Accounting Profit - Implicit Costs = 0, or Accounting Profit = Implicit Costs. Firm B will not exit the market, as zero economic profit means it is covering all opportunity costs and is doing as well as its next best alternative.

Question 8

A software developer starts a company, investing $200,000 of her own capital, which could have been invested for a 10% annual return. She hires two programmers for $80,000 each per year and pays $30,000 in annual rent. Her firm generates $400,000 in revenue. Had she not started her own company, she could have earned $120,000 as a senior developer. What are the company's annual accounting profit and economic profit?

  1. Accounting profit of $210,000 and economic profit of $210,000
  2. Accounting profit of 70,000andeconomicprofitof−70,000 and economic profit of -70,000
  3. Accounting profit of $210,000 and economic profit of $90,000
  4. Accounting profit of $210,000 and economic profit of $70,000 (correct answer)
Explanation: Explicit costs are the salaries (2 * $80,000 = 160,000)andrent(160,000) and rent (30,000), totaling $190,000. Accounting profit = Revenue - Explicit Costs = $400,000 - $190,000 = 210,000.Implicitcostsaretheforgoneopportunities:theforgonesalary(210,000. Implicit costs are the forgone opportunities: the forgone salary (120,000) and the forgone interest on capital (10% of $200,000 = $20,000), totaling $140,000. Economic profit = Accounting Profit - Implicit Costs = $210,000 - $140,000 = $70,000.

Question 9

A family-run bakery operates in a building owned by the family. To better track performance, the family decides to start paying rent to itself, transferring an amount equal to the property's market rental rate from the business account to a family trust account. How does this accounting change affect the bakery's profits?

  1. Both accounting profit and economic profit decrease.
  2. Accounting profit decreases, but economic profit remains the same. (correct answer)
  3. Accounting profit remains the same, but economic profit decreases.
  4. Both accounting profit and economic profit remain the same.
Explanation: Before the change, the forgone rent was an implicit cost. After the change, it becomes an explicit cost. Accounting profit (TR - Explicit Costs) will decrease because explicit costs have increased by the amount of the rent. Economic profit (TR - Explicit Costs - Implicit Costs), however, will remain the same. The total economic cost has not changed; a cost of a specific amount has simply moved from the 'implicit' category to the 'explicit' category.

Question 10

If a firm's accounting profit is less than its normal profit for a sustained period, what must be true?

  1. The firm must also be experiencing an accounting loss.
  2. The firm is experiencing an economic loss and will likely exit the industry in the long run. (correct answer)
  3. The firm should shut down operations immediately.
  4. The firm's total revenue is less than its total variable cost.
Explanation: Normal profit is defined as the level of accounting profit that results in zero economic profit. This means normal profit is equal to the firm's total implicit costs. If accounting profit is less than normal profit, it means accounting profit is less than implicit costs. Since Economic Profit = Accounting Profit - Implicit Costs, this condition implies that the firm is experiencing an economic loss (a negative economic profit). A sustained economic loss provides an incentive for the firm to exit the industry in the long run.

Question 11

A bakery owner calculates that her accounting profit is $80,000 annually. If she had invested her $200,000 startup capital in bonds yielding 4% annually instead of opening the bakery, and if she could have earned $45,000 working as a manager elsewhere, what is her economic profit?

  1. $27,000 (correct answer)
  2. $35,000
  3. $53,000
  4. $80,000
Explanation: Economic profit = Accounting profit - Implicit costs. The implicit costs include the forgone interest on capital ($200,000 × 0.04 = 8,000)andtheforgonesalary(8,000) and the forgone salary (45,000). Total implicit costs = $8,000 + $45,000 = $53,000. Therefore, economic profit = $80,000 - $53,000 = $27,000. Choice B incorrectly only subtracts the forgone salary. Choice C incorrectly only subtracts the forgone interest. Choice D confuses economic profit with accounting profit.

Question 12

An economic analyst states that 'the airline industry is earning robust accounting profits, but due to the high opportunity cost of the massive capital invested, the economic profits are razor-thin.' This statement implies that:

  1. the industry's accounting profits are approximately equal to a normal profit. (correct answer)
  2. the industry is likely to see a significant number of new airlines entering the market.
  3. the explicit costs of operating an airline are approximately equal to the total revenue.
  4. the airline industry must be a perfectly competitive market.
Explanation: When you encounter questions about accounting versus economic profits, remember that the key distinction lies in how costs are measured. Accounting profit only considers explicit costs (actual cash payments), while economic profit includes both explicit and implicit costs (opportunity costs of resources). The analyst's statement reveals a crucial insight: the airline industry has "robust accounting profits" but "razor-thin economic profits." This happens when implicit costs—particularly the opportunity cost of massive capital investments—are very high. When you subtract these large opportunity costs from accounting profits, you get economic profits that are close to zero. Zero economic profit is exactly what economists call "normal profit"—the minimum return needed to keep resources in their current use. Let's examine why the other options miss the mark. Option B is incorrect because razor-thin economic profits actually discourage new entrants; firms only enter markets expecting above-normal returns. Option C misunderstands the relationship described—if explicit costs equaled total revenue, accounting profits would be zero, contradicting the "robust" profits mentioned. Option D makes an unfounded leap; while perfectly competitive markets tend toward normal profits in long-run equilibrium, many market structures can exhibit this profit pattern, and airlines typically operate in oligopolistic markets with significant barriers to entry. Study tip: When you see profit-related questions, always distinguish between accounting and economic perspectives. Economic profit near zero doesn't mean a business is failing—it means resources are earning their opportunity cost, which is actually the equilibrium condition in many markets.

Question 13

A consulting firm's annual financial data shows: total revenue $400,000, salaries and wages $200,000, rent $60,000, materials $40,000, and depreciation $20,000. The owner could earn $80,000 working elsewhere and has $500,000 invested in the business that could earn 6% in alternative investments. What is the firm's economic profit?

  1. $80,000
  2. $50,000
  3. $-30,000 (correct answer)
  4. $110,000
Explanation: First, calculate total explicit costs: $200,000 + $60,000 + $40,000 + $20,000 = $320,000. Accounting profit = $400,000 - $320,000 = 80,000.Next,calculateimplicitcosts:foregonesalary(80,000. Next, calculate implicit costs: foregone salary (80,000) + foregone investment return ($500,000 × 0.06 = $30,000) = $110,000. Economic profit = Accounting profit - Implicit costs = $80,000 - 110,000=−110,000 = -30,000. The negative economic profit indicates the firm is not covering all opportunity costs. Choice A shows only accounting profit. Choice B incorrectly calculates implicit costs. Choice D adds instead of subtracts implicit costs.

Question 14

A consultant can either work for a large firm for a salary of $120,000 or start her own practice. If she starts her own practice, she anticipates total revenues of $300,000 and explicit costs of $190,000. However, starting her own practice allows her to maintain a flexible schedule, which she values at $20,000 per year compared to the rigid schedule at the large firm. What is the economic profit of starting her own practice?

  1. -$10,000
  2. $110,000
  3. -$30,000
  4. $10,000 (correct answer)
Explanation: First, calculate the accounting profit: $300,000 (Revenue) - $190,000 (Explicit Costs) = $110,000. Next, determine the net implicit cost. The implicit cost is the opportunity cost of the next best alternative. This includes the forgone salary of $120,000, but it is offset by the non-pecuniary benefit of the flexible schedule, valued at $20,000. So, the net implicit cost is $120,000 - $20,000 = $100,000. Economic profit is accounting profit minus net implicit costs: $110,000 - $100,000 = $10,000.

Question 15

The owner of a small firm currently pays $2,000 per month in rent for an office. The firm's monthly revenue is $20,000 and other explicit costs are $15,000. The owner is considering purchasing an office space, which would eliminate the rent payment but require using personal funds that currently generate $1,500 per month in interest. What would be the effect on the firm's monthly accounting and economic profits if the owner purchases the office?

  1. Accounting profit will increase, but economic profit will decrease.
  2. Accounting profit will increase, and economic profit will also increase. (correct answer)
  3. Accounting profit will decrease, but economic profit will increase.
  4. Both accounting profit and economic profit will decrease.
Explanation: Currently: Accounting Profit = 20,000−(20,000 - (15,000 + $2,000) = $3,000. Economic Profit = $3,000 - implicit costs. After purchase: Explicit costs decrease by $2,000 (rent), so the new accounting profit = $20,000 - $15,000 = $5,000 (an increase of $2,000). However, a new implicit cost of 1,500(forgoneinterest)iscreated.Thechangeineconomicprofitisthechangeinaccountingprofitminusthechangeinimplicitcosts:+1,500 (forgone interest) is created. The change in economic profit is the change in accounting profit minus the change in implicit costs: +2,000 - (+1,500)=+1,500) = +500. Both accounting profit and economic profit will increase.

Question 16

A chef uses $50,000 of her personal savings to open a restaurant; these savings had been earning 5% interest annually. In its first year, the restaurant's total revenue is $200,000, and its explicit costs for food, labor, and rent are $180,000. The chef could have earned $30,000 per year working for another restaurant. What is the restaurant's economic profit in the first year?

  1. $20,000
  2. -$10,000
  3. -$12,500 (correct answer)
  4. $17,500
Explanation: First, calculate accounting profit: Total Revenue - Explicit Costs = $200,000 - $180,000 = 20,000.Next,calculatetotalimplicitcosts.Thesearetheforgoneearnings:theforgonesalary(20,000. Next, calculate total implicit costs. These are the forgone earnings: the forgone salary (30,000) and the forgone interest on savings (5% of $50,000 = $2,500). Total implicit costs are $30,000 + $2,500 = $32,500. Finally, economic profit is accounting profit minus implicit costs: $20,000 - 32,500=−32,500 = -12,500.

Question 17

A company operates out of a building it owns, which it could rent out to another business for $5,000 per month. The company's monthly total revenue is $100,000, its monthly payroll is $60,000, and its monthly cost for materials is $30,000. Which of the following correctly identifies the company's monthly profits?

  1. Accounting profit = $5,000; Economic profit = $5,000
  2. Accounting profit = $10,000; Economic profit = $10,000
  3. Accounting profit = $10,000; Economic profit = $5,000 (correct answer)
  4. Accounting profit = $5,000; Economic profit = $0
Explanation: Accounting profit is total revenue minus explicit costs. The explicit costs are payroll (60,000)andmaterials(60,000) and materials (30,000), totaling $90,000. So, accounting profit = $100,000 - $90,000 = $10,000. Economic profit subtracts implicit costs from accounting profit. The implicit cost is the opportunity cost of owning the building, which is the forgone rent of $5,000. So, economic profit = $10,000 - $5,000 = $5,000.

Question 18

An entrepreneur quits a job paying $100,000 per year to start a new business. In the first year, the business generates total revenue of $500,000 and incurs explicit costs of $410,000 for wages, materials, and rent. Which statement accurately describes the firm's performance in its first year?

  1. The firm earns a positive accounting profit but incurs an economic loss. (correct answer)
  2. The firm earns both a positive accounting profit and a positive economic profit.
  3. The firm incurs an accounting loss but earns a positive economic profit.
  4. The firm incurs both an accounting loss and an economic loss.
Explanation: Accounting profit is total revenue minus explicit costs: $500,000 - $410,000 = $90,000. Economic profit is accounting profit minus implicit costs. The primary implicit cost is the forgone salary of $100,000. Therefore, economic profit is $90,000 - 100,000=−100,000 = -10,000. The firm earns a positive accounting profit (90,000)butaneconomicloss(−90,000) but an economic loss (-10,000).

Question 19

A firm in a competitive market finds that at its current output level, its total revenue is $10,000, total explicit costs are $8,000, and total implicit costs are $3,000. The firm's total fixed costs are $4,000, all of which are explicit. What is the firm's situation and what should it do in the short run?

  1. The firm has an economic loss and should shut down immediately.
  2. The firm has a positive economic profit and should maintain its current output.
  3. The firm has a positive accounting profit but an economic loss, and it should continue to operate. (correct answer)
  4. The firm has an accounting loss and should exit the market in the long run.
Explanation: First, assess the profits. Accounting profit = TR - Explicit Costs = $10,000 - $8,000 = $2,000 (positive). Economic profit = Accounting Profit - Implicit Costs = $2,000 - 3,000=−3,000 = -1,000 (an economic loss). Next, determine the short-run decision. The firm should operate if Total Revenue (TR) exceeds Total Variable Costs (TVC). Total explicit costs are $8,000 and total fixed costs (explicit) are $4,000, so TVC = $8,000 - $4,000 = 4,000.SinceTR(4,000. Since TR (10,000) > TVC ($4,000), the firm is covering its variable costs and contributing to fixed costs, so it should continue to operate in the short run.

Question 20

Over the course of a year, a perfectly competitive firm's economic profit changes from a positive value to zero. During this time, the market price for its product and its total explicit costs have both remained constant. Which of the following provides the best explanation for this change?

  1. New firms have entered the industry, increasing competition.
  2. The firm's accounting profit has decreased.
  3. The firm has become less efficient in its production process.
  4. The opportunity cost of the resources supplied by the firm's owner has increased. (correct answer)
Explanation: Economic Profit = Total Revenue - Explicit Costs - Implicit Costs. We are told TR (from constant price) and explicit costs are constant. This means that accounting profit (TR - Explicit Costs) has also remained constant. For economic profit to decrease from positive to zero while accounting profit remains constant, implicit costs must have increased. An increase in the opportunity cost of the owner's resources (e.g., a higher-paying job offer for the owner) would cause this.