Which of the following statements are true in regard to the relationship between accounting profits and economic profits?
In forming your response, note the definitions in this website https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounting-profit-vs-economic-profit/#:~:text=Accounting%20Profit%20vs.%20Economic%20Profit%20Accounting%20profit%20is,flow%20that%E2%80%99s%20generated%20above%20all%20other%20opportunity%20costs
- A. Accounting profits can be positive while economic can be negative at the same time.
- B. Economic profits account for the required returns to investors, which accounting profits do not explicitly do so.
- C. Both a and b
- D. Neither a nor b
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Assume that positive economic profits exist within an industry. If that is happening, which of the following statements are true? Always choose the best answer, even if it strikes you as not a perfectly clear answer.
- A. There is incentive for additional firms and economic resources to enter into this industry.
- B. Companies in the industry are earning profits and returns on investment that are above the normal level.
- C. Both a and b
- D. Neither a nor b
Assume that output is occurring at a point where marginal revenue is equal to marginal cost, but below average total cost. Which of the following are true?
- A. Firms will be likely to exit the industry.
- B. Accounting profits could be positive or negative.
- C. Both a and b
- D. Neither a nor b.
An industry is currently producing output at a level where normal profits are being earned. Suddenly, as in some industries like food delivery during a pandemic, the industry experiences an increase in the demand for its products. Which one of the following is the most likely change?
- A. Prices will increase and additional economic resources will enter into the industry.
- B. Investor required returns will increase and profits will continue to be normal.
- C. Both a and b
- D. Neither a nor b.
What is meant by the term “mezzanine capital?”
