Question 1

Which of the following represents the key difference between the short run and the long run?

Accepted Answer

In the short run, firms face fixed costs due to commitments like leases, which cannot be changed. In the long run, all costs become variable as firms can adjust all inputs.

Question 2

The opportunity costs associated with the use of resources owned by a firm are:

Accepted Answer

Opportunity costs are the costs of the next best alternative foregone, and are not reflected in accounting statements. These costs are called implicit costs. A, C, and D are not correct because externalities are indirect costs or benefits not reflected in market prices, explicit costs are costs that involve direct payment of money, and sunk costs are costs that have already been incurred and cannot be recovered.

Question 3

Suppose that a small business takes in monthly revenue of $100,000. Labor, rental, energy, and other purchased input costs are $70,000. The owner/entrepreneur could earn $5,000 per month in another job, and the owner/entrepreneur could get a return of $5,000 each month if she sold her business and invested the net proceeds in a financial asset, such as a treasury bond. Which of the following correctly describes her monthly economic profit?

Accepted Answer

The total opportunity cost for the owner/entrepreneur is $10,000 ($5,000 from lost wages + $5,000 she could earn from selling her business and investing the proceeds). Therefore, the economic profit is $30,000 ($100,000 in revenue - $70,000 in costs - $10,000 in opportunity cost). Therefore, the correct answer is D, $20,000.

Question 4

The difference between a firm's total revenues and total costs when all explicit and implicit costs are included is the firm's:

Accepted Answer

Economic profit takes into account both explicit and implicit costs, while accounting profit only includes explicit costs. The opportunity cost of capital is the cost of giving up the opportunity to invest capital elsewhere, and long-run average total cost is a measure of the average cost per unit of output produced by the firm.

Question 5

When total revenue minus total cost is equal to zero, the firm is:

Accepted Answer

Total revenue minus total cost being equal to zero means that the firm is breaking even and earning only a normal profit, which is just enough to cover its costs but not earning above-average economic profits or losing money.

Question 6

Two friends, Diane and Sam, own and run a bar. Diane tends bar on Monday, Wednesday, and Friday and receives a wage in addition to tips. Sam tends bar on Tuesday, Thursday, and Saturday and receives only tips. Which of the following represents an implicit cost of operating the bar?

Accepted Answer

Implicit costs are the opportunity costs of using resources that the firm already owns. Sam's time is an implicit cost because it represents the opportunity cost of what Sam could earn or do with his time if he weren't working at the bar. Diane's wage and both Diane's and Sam's tips are explicit costs, not implicit costs.

Question 7

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000, for food and $2,000 for gas and electricity. What is the sum of his implicit costs?

Accepted Answer

Implicit costs are the opportunity costs of using resources that the firm already owns. Here, the chef's implicit costs include the salary he would forego ($20,000) and the rental income he would lose ($6,000), totaling $26,000.

Question 8

Cash payments to a steel mill for steel used in production would be an example of:

Accepted Answer

Cash payments for steel used in production is an example of explicit costs, which are the direct, out-of-pocket expenses incurred by a business, such as payments to suppliers or wages to employees.

Question 9

Economic profit is:

Accepted Answer

Economic profit is defined as the difference between total revenue and all costs (both explicit costs, such as wages and rent, and implicit costs, such as opportunity costs). Therefore, option D, which subtracts both explicit and implicit costs from total revenue, is the correct choice. Options A, B, and C do not account for implicit costs and therefore do not provide a complete measure of economic profit.

Question 10

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What is the sum of his explicit costs?

Accepted Answer

The answer of A young chef is considering opening his...

Question 11

Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 6 percent interest and uses the money in his new business. He uses a building he owns as a hanger and could rent it out for $5,000 per year. He rents a computer for $1,200, buys office supplies for $500, rents an airplane for $6,000, pays $1,300 for fuel and maintenance, and hires one worker for $30,000. Sam's total revenue from pilot training classes this year equaled $90,400. Sam's accounting profit this year equals:

Accepted Answer

Sam's total costs:
- Opportunity cost of his salary as a pilot: $40,000
- Withdrawal from savings: $10,000 x 0.06 = $600
- Rent forgone from owning building as a hanger: $5,000
- Rent for computer: $1,200
- Office supplies: $500
- Rent for airplane: $6,000
- Fuel and maintenance for airplane: $1,300
- Worker salary: $30,000

Total costs: $84,600

Sam's accounting profit:
Revenue - Total costs = $90,400 - $84,600 = $5,800

However, Sam's economic profit would be lower once the opportunity cost of his time and the cost of capital (the money withdrawn from savings) are considered.

Question 12

A firm has $200 million in total revenue and explicit costs of $190 million. Suppose its owners have invested $100 million in the company at an opportunity cost of 10 percent interest rate per year. The firm's economic profit is:

Accepted Answer

Economic profit is calculated as total revenue minus total costs (explicit and implicit). The implicit cost here is the opportunity cost of the owners' investment, which is $10 million (10% of $100 million). Therefore, economic profit = $200 million - $190 million - $10 million = $0.

Question 13

Implicit costs are:

Accepted Answer

Implicit costs refer to the opportunity costs of using resources owned by the entrepreneur in his/her own business. These costs may not involve actual cash payments, but rather the foregone income or benefits that could have been earned if the resources were used in another way. Option B refers to explicit costs, option C refers to variable costs, and option D refers to out-of-pocket costs.

Question 14

Which of the following would be considered an implicit cost?

Accepted Answer

Foregone rent on assets owned by the firm is considered an implicit cost because it represents the opportunity cost of using those assets for other purposes, such as renting them out for income. Health insurance, water bills, and salaries are all examples of explicit costs that involve direct payments from the firm.

Question 15

Unlike implicit costs, explicit costs:

Accepted Answer

Explicit costs are actual cash payments made by the firm, such as wages and salaries, rent, and utilities. They are easily identified in the accounting statements of the firm and are deducted from revenue to calculate profit. Unlike implicit costs, which reflect opportunity costs, explicit costs involve actual cash outflows.

Question 16

What is the difference between economic and accounting profit? Why is a distinction between them important?

Accepted Answer

The answer of What is the difference between economic and...

Question 17

Monetary payments to nonowners of a firm are called:

Accepted Answer

The answer of Monetary payments to nonowners of a firm...

Question 18

Variable inputs are defined as any resource that:

Accepted Answer

Variable inputs can be adjusted or changed as the output or production level changes. Examples of variable inputs include labor, energy, and raw materials.

Question 19

A firm's opportunity cost of using resources provided by the firm's owners is called:

Accepted Answer

The opportunity cost of using resources provided by the firm's owners is referred to as implicit costs. These costs are not reflected in accounting statements, but they are real and represent the foregone opportunities of using those resources elsewhere. Sunk costs refer to costs that have already been incurred and cannot be recovered. Fixed costs are costs that do not vary with the level of output, while explicit costs are those costs that are directly incurred and can be easily quantified.

Question 20

Paul's Plumbing is a small business that employs 12 people. Which of the following is the best example of an implicit cost incurred by this firm?

Accepted Answer

An implicit cost is a cost that is not visible or explicit, but rather consists of opportunity costs of using resources owned by the firm. In this case, the accounting services provided by Paul's wife, who is an accountant, are not paid for by the firm, but represent a cost that the firm incurs because Paul's wife could be using her time to earn money elsewhere. The other options, such as tax payments, wages, and payroll taxes, are explicit costs that are easily identifiable and measurable.

Quiz 7: Production Costs