Question 1

An example of an explicit cost for the owner of a tattoo parlor would be the wages that she could earn if she worked as a graphic artist for an advertising agency.

Accepted Answer

The wages that she could earn if she worked as a graphic artist for an advertising agency represent an opportunity cost, not an explicit cost. Explicit costs are direct payments made to others in the course of running a business, such as rent, utilities, and employee wages.

Question 2

Accountants keep track of the money that flows into and out of firms.

Accepted Answer

This statement is true. Accountants are responsible for recording financial transactions, preparing financial statements, and ensuring compliance with tax laws and regulations.

Question 3

When economists speak of a firm's costs, they are usually excluding the opportunity costs.

Accepted Answer

Economists typically include opportunity costs in a firm's costs, as these represent the value of the next best alternative foregone by choosing a particular course of action. By considering both explicit costs (such as wages and rent) and implicit costs (such as foregone income from an alternative use of resources), economists can get a more accurate picture of the true cost of running a business.

Question 4

Diminishing marginal product exists when the total cost curve becomes horizontal as outputs increases.

Accepted Answer

Diminishing marginal product is a phenomenon in which the marginal product of an additional unit of input decreases as the total amount of input increases. It is not directly related to the shape of the total cost curve.

Question 5

The field of industrial organization addresses how the number of firms affects prices in a market and the efficiency of the market outcome.

Accepted Answer

Industrial organization is the study of how market structure (i.e. the number of firms, their market shares, and the degree of product differentiation) affects market performance (i.e. pricing, efficiency, innovation, and cooperation).

Question 6

Implicit costs are costs that do not require an outlay of money by the firm.

Accepted Answer

Implicit costs refer to the opportunity cost of using a firm's resources for a particular activity. They are not actual monetary expenses, but rather the forgone benefits of choosing one option over another. Examples of implicit costs include the salary a business owner could have earned by working elsewhere, the rent the owner could have earned by renting out a building owned by the firm, or the interest revenue the firm could have earned if it had invested its cash in a financial instrument instead of using it in the business.

Question 7

Accountants often ignore implicit costs.

Accepted Answer

Implicit costs refer to the opportunity costs associated with using a resource for one purpose instead of another. These costs are not reflected in the accounting records and are often overlooked by accountants.

Question 8

The opportunity cost of capital is an implicit cost almost every business incurs.

Accepted Answer

The opportunity cost of capital is the cost of not using a certain amount of capital in its next best alternative use. It is an implicit cost because it is not an actual expenditure, but rather a potential revenue that is foregone. Therefore, almost every business incurs this cost.

Question 9

The economic field of industrial organization examines how firms' decisions about prices and quantities depend on the market conditions they face.

Accepted Answer

Industrial organization is the study of how firms' behavior and structure affect the market outcomes, and how market conditions in turn affect firms' decisions about prices, quantities, and other aspects of their operations.

Question 10

Although economists and accountants treat many costs differently, they both treat the cost of capital the same.

Accepted Answer

Economists consider opportunity costs, including the cost of capital as the return that could have been earned on the next best alternative investment. Accountants, however, typically focus on explicit costs and do not always account for opportunity costs in the same way, leading to different treatments of the cost of capital.

Question 11

Accounting profit is greater than or equal to economic profit.

Accepted Answer

Accounting profit only subtracts explicit costs from total revenue, while economic profit subtracts both explicit and implicit costs, making economic profit lower than or equal to accounting profit.

Question 12

A firm's total profit equals its marginal revenue minus its marginal cost.

Accepted Answer

A firm's total profit equals its total revenue minus its total cost, not its marginal revenue minus its marginal cost. Marginal revenue is the additional revenue gained from selling one more unit of a good or service, while marginal cost is the additional cost incurred from producing one more unit.

Question 13

The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only.

Accepted Answer

Economic profit takes into account both explicit costs (such as expenses for raw materials, labor, and equipment) and implicit costs (such as the opportunity cost of the owner's time or capital used to start the business). Accounting profit, on the other hand, only considers explicit costs in its calculation.

Question 14

Anna borrows $5,000 from a bank and withdraws $1,000 from her personal savings to start a coffee shop. The interest rate is 5 percent for both the bank loan and her personal savings. Her opportunity cost of capital is $250.

Accepted Answer

The answer of Anna borrows $5,000 from a bank and...

Question 15

Economists and accountants both include forgone income as a cost to a small business owner.

Accepted Answer

Economists consider forgone income as an opportunity cost, but accountants typically do not include forgone income in their financial calculations, focusing instead on explicit costs.

Question 16

Economic profit is greater than or equal to accounting profit.

Accepted Answer

Economic profit takes into account not only explicit (accounting) costs but also implicit costs such as opportunity costs. Therefore, economic profit is generally lower than accounting profit or even negative.

Question 17

Diminishing marginal productivity implies decreasing total product.

Accepted Answer

Diminishing marginal productivity implies that each additional unit of input produces less additional output, but total product continues to increase, just at a decreasing rate.

Question 18

Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm.

Accepted Answer

Economists argue that implicit costs, such as the opportunity cost of using owner's time and resources for the business, should be included in the cost analysis of a firm. However, accountants tend to focus only on explicit costs, such as rent, wages, and materials.

Question 19

An example of an explicit cost would be the wages that a business owner pays her employees.

Accepted Answer

An explicit cost is a direct payment made by a business for goods or services, such as wages paid to employees.

Question 20

Profit equals total revenue minus total cost.

Accepted Answer

This is the basic formula for calculating profit.

Quiz 13: The Costs of Production