Question 1

Accounting profit differs from economic profit because:

Accepted Answer

Accounting profit only takes into account explicit costs like wages, rent, and material costs. Economic profit considers both explicit and implicit costs, including opportunity costs - the value of the next best alternative foregone by choosing a certain action. Thus, economic costs are generally higher than accounting costs.

Question 2

Suppose the Chicago Cubs could rent out Wrigley Field (the field they play on) to local youth leagues for $11,000 per month. The $11,000 per month is the _____ cost of capital.

Accepted Answer

The $11,000 per month is the implicit cost of capital because it represents the opportunity cost of using the field for something other than renting it out to local youth leagues. This cost is not directly paid out but is the foregone income from the next best alternative use of the asset.

Question 3

Profit computed without implicit costs is _____ profit.

Accepted Answer

Accounting profit only takes into account explicit costs, such as wages and rent, while ignoring implicit costs, such as opportunity costs and foregone potential earnings.

Question 4

Money that must be paid for the use of factors of production such as labor and capital is an:

Accepted Answer

The definition given in the question matches the definition of an explicit cost, which is a direct monetary cost incurred by a firm in order to produce a good or service. Accounting profit is the total revenue earned by a firm minus its explicit costs, while economic profit takes into account implicit costs such as opportunity costs.

Question 5

In central Florida, the demand for real estate has been increasing rapidly for years. Therefore, the _____ cost of capital is _____ in central Florida's orange groves.

Accepted Answer

The increasing demand for real estate indicates that the implicit cost of capital, which is the opportunity cost of using funds to invest in real estate rather than other investments, is increasing.

Question 6

The implicit cost of capital is:

Accepted Answer

The implicit cost of capital refers to the opportunity cost of the capital used by a business, which is the return that could have been earned on alternative investments. This cost is not expressed in monetary terms, unlike the explicit cost of capital which includes interest payments on debt and dividends paid to shareholders. Depreciation and the cost of human capital are not components of the implicit cost of capital.

Question 7

The implicit cost of capital is:

Accepted Answer

The implicit cost of capital is the opportunity cost of using capital in a particular manner. It represents the amount of return that a company could have earned if it invested the same amount of money into another opportunity with similar risks. Therefore, it is an important factor to consider for determining economic profit. Options A and B relate to explicit costs associated with leasing or buying machines and do not capture the opportunity cost of capital. Option D is incorrect because implicit costs are relevant for determining economic profit.

Question 8

Jacquelyn is a student at a major state university. Which of the following is NOT an explicit cost of her attending college?

Accepted Answer

The salary that Jacquelyn could have earned working full-time is an implicit cost of her attending college, not an explicit cost. Explicit costs are those that require an outlay of money, while implicit costs are those that do not.

Question 9

For most firms, economic profit is:

Accepted Answer

Economic profit is typically less than accounting profit because it accounts for both explicit and implicit costs, including opportunity costs, whereas accounting profit only considers explicit costs.

Question 10

Suppose a local floral shop has explicit costs of $200,000 per year and implicit costs of $50,000 per year. If the store earned an economic profit of $50,000 last year, the store's accounting profit equaled:

Accepted Answer

Accounting profit is calculated by subtracting explicit costs from total revenue. Given that the economic profit (which accounts for both explicit and implicit costs) is $50,000, and the implicit costs are $50,000, we add these to find the total revenue minus explicit costs. Therefore, the accounting profit is $200,000 (explicit costs) + $50,000 (economic profit) = $250,000 in revenue - $200,000 (explicit costs) = $50,000 + $50,000 = $100,000.

Question 11

Accountants use only _____ costs in their computations.

Accepted Answer

Accountants use only explicit costs in their computations, which refer to actual out-of-pocket expenses incurred by the business. Opportunity costs and implicit costs are not taken into consideration in traditional accounting practices. Variable costs may be included in computations, but they are not the only costs used.

Question 12

After earning your BA, you have to decide whether to take a job that will pay you $45,000 per year or spend an additional two years earning an MBA. If you decide to pursue the graduate degree, your annual expenses for tuition, books, board, and lodging will be $32,000. You have been offered a scholarship for $10,000 per year, but to pay the remaining $22,000 per year, you would have to cash in savings bonds from your grandparents that have been earning $500 in interest per year. The annual opportunity cost of earning your MBA is:

Accepted Answer

The opportunity cost includes the salary you forego ($45,000), the net cost of education ($22,000 after the scholarship), and the lost interest from the savings bonds ($500), totaling $67,500.

Question 13

Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando. Sarah's husband, an economist, claims Sarah lost $43,002 running her pottery studio. This means her husband is claiming that she incurred _____ in _____ costs.

Accepted Answer

Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando. This means that her total revenue was $43,002 more than her total costs. Her husband, an economist, claims Sarah lost $43,002 running her pottery studio. This means that her total costs were $43,002 more than her total revenue. The difference between these two amounts is $86,004, which is the amount of implicit costs that Sarah incurred.

Question 14

You own a small deli that sells sandwiches, salads, and soup. Which of the following is an implicit cost of the business?

Accepted Answer

An implicit cost is the opportunity cost of using resources owned by the business for its current purpose instead of the next best alternative. In this case, the job offer you did not accept represents the income you forego by running your deli instead of working elsewhere.

Question 15

Expenses associated with factors of production may be _____ costs.

Accepted Answer

Expenses associated with factors of production can be implicit (not directly paid out, such as the opportunity cost of using one's own resources), opportunity (the cost of foregone alternatives), or explicit (directly paid out, such as wages or rent).

Question 16

Part of the _____ associated with the Chicago Cubs baseball team is their batting cages used in practice.

Accepted Answer

The batting cages in question are a physical asset, or capital, that the team uses to improve players' skills during practice.

Question 17

Costs that are included in the economic concept of cost but that are NOT explicit costs are:

Accepted Answer

Implicit costs are the opportunity costs of using a resource for a particular purpose instead of the next best alternative use. These costs are not actually incurred by a firm as a separate cash outflow, and therefore not recorded in their accounting records. However, they are included in the economic concept of cost as they represent the value of resources used in a particular venture, and thus affect the calculation of economic profit.

Question 18

Suppose a local hardware store has explicit costs of $2 million per year and implicit costs of $44,000 per year. If the store earned an economic profit of $50,000 last year, this means that the store's accounting profit equaled:

Accepted Answer

Accounting profit equals total revenue minus explicit costs. Therefore, the accounting profit for this hardware store is:
Total revenue - Explicit costs = $50,000 + $2,000,000 = $2,050,000
Accounting profit = $2,050,000 - $2,000,000 = $50,000
Therefore, the hardware store's accounting profit is $50,000, which is equal to the economic profit it earned. Choice A is the correct answer.

Question 19

If the accounting profit for a firm is negative:

Accepted Answer

If the accounting profit is negative, it means the firm's revenues are less than its explicit costs. Since economic profit also considers implicit costs, it must be negative as well.

Question 20

Which of the following statements about opportunity cost is FALSE?

Accepted Answer

Opportunity cost is not synonymous with explicit cost; it includes both explicit and implicit costs, representing the total value of what is foregone to pursue a particular option.

Quiz 9: Decision Making by Individuals Firms

Accounting profit differs from economic profit because:

Suppose the Chicago Cubs could rent out Wrigley Field (the field they play on) to local youth leagues for $11,000 per month. The $11,000 per month is the _____ cost of capital.

Profit computed without implicit costs is _____ profit.

Money that must be paid for the use of factors of production such as labor and capital is an:

In central Florida, the demand for real estate has been increasing rapidly for years. Therefore, the _ cost of capital is _ in central Florida's orange groves.

The implicit cost of capital is:

The implicit cost of capital is:

Jacquelyn is a student at a major state university. Which of the following is NOT an explicit cost of her attending college?

For most firms, economic profit is:

Suppose a local floral shop has explicit costs of $200,000 per year and implicit costs of $50,000 per year. If the store earned an economic profit of $50,000 last year, the store's accounting profit equaled:

Accountants use only _____ costs in their computations.

Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando. Sarah's husband, an economist, claims Sarah lost $43,002 running her pottery studio. This means her husband is claiming that she incurred _ in _ costs.

You own a small deli that sells sandwiches, salads, and soup. Which of the following is an implicit cost of the business?

Expenses associated with factors of production may be _____ costs.

Part of the _____ associated with the Chicago Cubs baseball team is their batting cages used in practice.

Costs that are included in the economic concept of cost but that are NOT explicit costs are:

Suppose a local hardware store has explicit costs of $2 million per year and implicit costs of $44,000 per year. If the store earned an economic profit of $50,000 last year, this means that the store's accounting profit equaled:

If the accounting profit for a firm is negative:

Which of the following statements about opportunity cost is FALSE?