Economic and accounting profits a) (10 marks). ( i) What are economic profits and how do they differ from accounting profits? (ii) If accounting profits are positive then does this imply that economic profits are positive and thus that firms should stay in an industry? (iii) If the owner of a firm consistently earns zero economic profit then would they be better off if they were to exit the industry? b) (10 marks). A landlord decides to evict her tenants from a property that she owns so that she can use the facility to run her own business. The annual rent on the property is $120,000. In order to run the business she must give up her current job that pays $50,000. She must invest $1,000,000 to buy equipment. The equipment does not depreciate and lasts forever. Her cost of capital is 10%. Production costs are constant and equal to $5 per unit and she can sell 100,000 units at $10 per unit. Calculate annual economic profits and interpret what the number means?

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a i Economic profits are the total revenue of a firm minus all explicit and implicit costs including ... View the full answer