These are original Marlbridge practice questions, not past exam questions. The mark points are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. All people, firms and data are fictional. Only addition, subtraction and multiplication are needed, so a four-function calculator is enough.
Question 1 (multiple choice · foundation)
Teodor owns a bike-repair shop. Which of the following is an implicit cost of his business?
- (A) The interest Teodor could have earned on his own savings, which he used to buy tools
- (B) The wages Teodor pays to his part-time mechanic
- (C) The rent Teodor pays to the owner of the shop building
- (D) The interest Teodor pays on a bank loan used to buy a van
Answer and explanation
Answer: (A). Teodor uses his own savings, so no payment is made, but he gives up the interest they could have earned. That forgone interest is an implicit cost: the cost of his financial capital.
- (B) is a payment of money to someone else, so it is explicit.
- (C) is paid to a landlord, so it is explicit. It would be implicit only if Teodor owned the building and gave up rent he could have earned on it.
- (D) confuses borrowed money with the owner’s own money. Interest paid to a bank is an explicit cost.
Question 2 (multiple choice · core)
A firm is earning normal profit. Which statement must be true?
- (A) Its economic profit is zero, and its accounting profit equals its implicit costs.
- (B) Its accounting profit is zero.
- (C) Its total revenue equals its explicit costs.
- (D) It is making an economic loss and will leave the industry.
Answer and explanation
Answer: (A). Normal profit means the firm covers all its costs, explicit and implicit, with nothing left over. So economic profit is zero, and the accounting profit is exactly enough to pay for the implicit costs.
- (B) confuses accounting profit with economic profit. At normal profit, accounting profit is positive whenever there are implicit costs.
- (C) says the same as (B): revenue covering only explicit costs gives zero accounting profit, which would be an economic loss.
- (D) treats zero economic profit as a loss. At normal profit the owner does as well as in the next-best use, so there is no reason to leave.
Question 3 (multiple choice · core)
A fictional firm has total revenue of $90,000, explicit costs of $55,000 and implicit costs of $30,000. What is its economic profit?
- (A) $5,000
- (B) $35,000
- (C) $60,000
- (D) $25,000
Answer and explanation
Answer: (A). Economic profit = 90,000 − 55,000 − 30,000 = $5,000.
- (B) is the accounting profit (90,000 − 55,000): it leaves out implicit costs.
- (C) subtracts only the implicit costs (90,000 − 30,000) and leaves out the explicit costs.
- (D) subtracts implicit costs from explicit costs (55,000 − 30,000), which ignores revenue altogether.
Question 4 (calculation · core)
Ingrid runs the Halvorsen Pottery Studio. Last year it earned total revenue of $96,000. She paid $14,000 for clay and glazes, $6,000 for kiln electricity, $18,000 in wages to a part-time assistant and $2,000 for insurance. She owns the studio building, which she could rent out for $1,000 a month. Her next-best job is teaching art for $38,000 a year. She used $20,000 of her own savings for equipment; they could earn 4% a year.
(a) Calculate accounting profit. (b) Calculate implicit costs and economic profit. (c) What accounting profit would give Ingrid exactly normal profit? (d) The rent she could earn on the building rises to $1,500 a month. Calculate her new economic profit and state what it signals.
Worked solution
(a) Explicit costs = 14,000 + 6,000 + 18,000 + 2,000 = $40,000. Accounting profit = 96,000 − 40,000 = $56,000.
(b) Implicit costs: forgone rent 1,000 × 12 = $12,000; forgone salary $38,000; forgone interest 4% × 20,000 = $800. Total = $50,800. Economic profit = 56,000 − 50,800 = $5,200.
(c) Normal profit needs accounting profit = implicit costs = $50,800.
(d) Forgone rent = 1,500 × 12 = $18,000. Implicit costs = 18,000 + 38,000 + 800 = $56,800. Economic profit = 56,000 − 56,800 = −$800, an economic loss. Her accounting profit has not changed, but her resources could now earn more elsewhere (renting out the building and teaching), so the loss signals that she has a reason to leave.
Suggested mark points (4): 1 for $56,000; 1 for $50,800 and $5,200; 1 for $50,800 in (c); 1 for −$800 with the signal explained.
Common error: counting the building rent as explicit. Ingrid owns the building and pays no rent, so it is the rent she could earn that counts, as an implicit cost.
Question 5 (calculation · core)
Marrow Lane Bakery, a fictional firm, sells 500 cakes a week at $40 each. Its average total cost, including implicit costs, is $44 per cake. Of this, $6 per cake is implicit cost.
(a) Calculate economic profit or loss. (b) Calculate accounting profit. (c) The owner says: “Our accounts show a profit, so the bakery is a good use of my time and money.” Evaluate this claim. (d) At what price would the bakery earn exactly normal profit, if its quantity and costs do not change?
Worked solution
(a) Economic profit = (P − ATC) × Q = (40 − 44) × 500 = −$2,000: an economic loss of $2,000 a week.
(b) Explicit cost per cake = 44 − 6 = $38. Accounting profit = (40 − 38) × 500 = $1,000 a week. Check: 1,000 − (6 × 500) = 1,000 − 3,000 = −2,000. ✓
(c) The claim is wrong. The accounting profit of $1,000 is smaller than the implicit costs of $3,000. The owner’s time and money could earn $2,000 a week more in their next-best use. The bakery is not covering all its opportunity costs.
(d) Normal profit needs P = ATC = $44.
Suggested mark points (4): 1 for −$2,000; 1 for $1,000; 1 for rejecting the claim because accounting profit is below implicit costs; 1 for $44.
Question 6 (constructed response · core)
In the fictional country of Pelaro, firms that install home solar panels earn an average economic profit of $30,000 a year. Firms that print film photographs earn an average economic loss of $8,000 a year.
(a) Predict what will happen over time to the number of firms in each industry. Explain. (b) Explain why firms respond to economic profit rather than accounting profit. (c) A student says: “A photo-printing firm earning zero economic profit should close.” Evaluate this statement.
Model answer and suggested Marlbridge rubric
(a) Solar installation: the number of firms rises. Positive economic profit means owners earn more than their resources could earn elsewhere, so new firms have a reason to enter and existing firms to expand. Photo printing: the number of firms falls. An economic loss means owners could earn more elsewhere, so over time firms exit.
(b) Economic profit includes implicit costs, so it compares this use of the owner’s time, money and risk with the next-best use. A firm can show an accounting profit while earning less than the owner’s alternative. Only economic profit tells the owner whether to stay, enter or leave.
(c) The statement is wrong. Zero economic profit is normal profit: the firm covers all explicit and implicit costs, so the owner earns exactly what their resources could earn elsewhere. There is no gain from closing.
| Point | What earns it |
|---|---|
| 1 | Solar: entry, linked to positive economic profit |
| 1 | Photo printing: exit, linked to economic loss |
| 1 | Economic profit includes implicit costs, so it compares with the next-best use |
| 1 | Zero economic profit identified as normal profit, so no reason to close |
Question 7 (explanation · stretch)
Asha and Bram each own a fictional café. Each café earns an accounting profit of $70,000 a year. Asha’s next-best job pays $40,000 a year, and she gives up $5,000 a year in interest on her own savings used in the café. Bram’s next-best job pays $85,000 a year, and he has no savings in his café.
(a) Calculate each owner’s economic profit. (b) What is the highest salary Asha could be offered elsewhere and still earn at least normal profit from her café? (c) Asha decides that, compared with a safe job, she needs $8,000 a year to make the risk of running a café worthwhile. Recalculate her economic profit. (d) Explain why two firms with identical accounts can send different signals to their owners.
Model answer and suggested Marlbridge rubric
(a) Asha: implicit costs = 40,000 + 5,000 = $45,000, so economic profit = 70,000 − 45,000 = $25,000. Bram: implicit costs = $85,000, so economic profit = 70,000 − 85,000 = −$15,000 (an economic loss).
(b) Normal profit needs implicit costs = $70,000. With $5,000 forgone interest, the salary can be at most 70,000 − 5,000 = $65,000.
(c) Implicit costs = 40,000 + 5,000 + 8,000 = $53,000. Economic profit = 70,000 − 53,000 = $17,000.
(d) Accounting profit depends only on the firm’s revenue and payments, so the two cafés look the same in their books. Economic profit also depends on each owner’s alternatives. Bram gives up a well-paid job, so his café is a worse use of his resources than of Asha’s. Asha has a reason to stay (or expand); Bram has a reason to leave and take the other job.
| Point | What earns it |
|---|---|
| 1 | $25,000 for Asha and −$15,000 for Bram |
| 1 | $65,000, from setting implicit costs equal to accounting profit |
| 1 | $17,000, with risk compensation treated as an implicit cost |
| 1 | Explains that implicit costs depend on each owner’s next-best alternative, so the signals differ |
How did you do?
- Q1 wrong: re-read “The implicit costs of running a firm” in the study guide. Ask: is money paid to someone else?
- Q3, Q4 or Q7 wrong: work through Worked example 1 and Figure 1 again. List explicit and implicit costs separately first.
- Q2 or Q6(c) wrong: re-read “Normal profit”.
- Q5 wrong: re-read “Profit per unit” and Worked example 2.
- Q6(a) or (b) incomplete: re-read “How firms respond to profit”.
Then tick off the topic checklist.