Question 1

Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's costs for the resources that she supplies to the business equal
A) $70,000 per year.
B) $90,000 per year.
C) $0 per year.
D) $330,000 per year.

Accepted Answer

The answer of Sheila's Sports Shop is a very popular...

Question 2

Joe quits his job as an insurance agent and opens his own sporting goods store. If his profits as measured by his accountant are greater than zero, then
A) he made a good move because he is earning above normal profits.
B) his economic profit must be greater than zero.
C) his opportunity costs must be zero.
D) There is not enough information to determine his economic profit, if any.

Accepted Answer

Accounting profits do not account for opportunity costs, so without knowing Joe's opportunity costs, we cannot determine his economic profit.

Question 3

Sue owns a baking company. The company's total revenue for a month is $4000. The monthly costs of resources bought in the market and of resources owned by the firm are $2000 and monthly costs of resources supplied by the owner are $1000. Sue's economic profit for the month is equal to
A) $4000.
B) $3000.
C) $2000.
D) $1000.

Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, explicit costs are $2000, and implicit costs (resources supplied by the owner) are $1000. Therefore, economic profit is $4000 - $2000 - $1000 = $1000.

Question 4

Economic profit is the difference between total revenue and the
A) normal profit.
B) interest costs of production.
C) opportunity costs of production.
D) costs of resources bought in markets.

Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs, which include opportunity costs, from total revenue.

Question 5

A normal profit for a self-employed entrepreneur is I. an opportunity cost.
II) part of the implicit rental rate of the funds invested in the business.
A) only I
B) only II
C) both I and II
D) neither I nor II

Accepted Answer

The answer of A normal profit for a self-employed entrepreneur...

Question 6

Ed is a freelance writer who could work for a newspaper at $25,000 a year but instead works for himself for $41,000 a year. His only business expenses are $1,000 for writing materials and $12,000 for rent. Ed's normal profit is $1,000. Ed's economic profit from working as a freelance writer is
A) $1,000.
B) $2,000.
C) $15,000.
D) $25,000.

Accepted Answer

Ed's economic profit is calculated by subtracting his total costs (including opportunity costs) from his revenue. His revenue is $41,000. His explicit costs are $1,000 for materials and $12,000 for rent, totaling $13,000. His implicit cost, the opportunity cost of not working for the newspaper, is $25,000. Adding his normal profit of $1,000, his total costs are $39,000. Therefore, his economic profit is $41,000 - $39,000 = $2,000.

Question 7

Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. The typical payment for Lucinda's work is
A) all the revenue greater than her opportunity cost.
B) all the revenue greater than the capital investment.
C) a normal profit.
D) an economic profit.

Accepted Answer

The answer of Lucinda starts a business consulting company. She...

Question 8

The average return for supplying entrepreneurial ability is the entrepreneur's
A) accounting profit.
B) normal profit.
C) explicit profit.
D) economic profit.

Accepted Answer

The answer of The average return for supplying entrepreneurial ability...

Question 9

If economic profit is equal to zero, then
A) the entrepreneur's profit as measured by accountants is also equal to zero.
B) the entrepreneur's profit as measured by accountants must be less than zero.
C) the entrepreneur is making only a normal profit.
D) The entrepreneur's profit cannot be determined based on the information given.

Accepted Answer

Economic profit being zero means the entrepreneur is covering all costs, including opportunity costs, and is making a normal profit, which is the minimum required to keep resources in their current use.

Question 10

Suppose Pippi buys an oven for her pizza parlor for $100,000. Pippi's pizza tasted so pitiful she went out of business 12 months later. She was able to sell the pizza oven for $75,000. This decrease in the value of the oven is
A) the total implicit rental rate on the oven.
B) an economic loss.
C) economic depreciation.
D) interest forgone.

Accepted Answer

Economic depreciation refers to the decrease in the value of an asset over time, in this case, the oven's value decreased from $100,000 to $75,000.

Question 11

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's economic profit for the year?
A) $80,000
B) $50,000
C) $30,000
D) -$10,000

Accepted Answer

Heidi's economic profit is calculated by subtracting both explicit and implicit costs from the total revenue. The explicit costs are $50,000 (wages) + $20,000 (food) = $70,000. The implicit cost is the $40,000 salary she gave up. Total costs = $70,000 + $40,000 = $110,000. Revenue is $100,000. Economic profit = $100,000 - $110,000 = -$10,000.

Question 12

Economic profit is
A) equal to the firm's total revenue minus its opportunity costs.
B) an opportunity cost of operating the firm.
C) equal to the firm's total revenue minus its normal profit.
D) the average return for supplying entrepreneurial ability.

Accepted Answer

Economic profit is calculated as total revenue minus total costs, including both explicit and implicit (opportunity) costs.

Question 13

Flora's Flower Shop bought a new van for $23,000. Today, the market price of this van is $11,000. The economic depreciation of the van is
A) $23,000.
B) $12,000.
C) $11,000.
D) $34,000.

Accepted Answer

Economic depreciation is calculated as the original purchase price minus the current market price. So, $23,000 - $11,000 = $12,000.

Question 14

Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's costs for resources bought in the market equal
A) $70,000 per year.
B) $200,000 per year.
C) $330,000 per year.
D) $350,000 per year.

Accepted Answer

Sheila's costs for resources bought in the market include the cost of goods for resale ($230,000) and the wages for her four employees ($25,000 each, totaling $100,000). Therefore, the total cost is $230,000 + $100,000 = $330,000.

Question 15

Among the opportunity costs of a firm are all of the following EXCEPT
A) the owner's forgone wage.
B) costs of resources bought in markets, such as labor.
C) normal profits.
D) economic profits.

Accepted Answer

Economic profits are not considered an opportunity cost; they are the surplus after all costs, including opportunity costs, have been accounted for.

Question 16

An economic profit for a self-employed entrepreneur is
A) an opportunity cost.
B) the same as the normal profit.
C) a profit over and above opportunity cost.
D) None of the above answers is correct.

Accepted Answer

Economic profit is the profit over and above the opportunity cost, meaning it is the surplus after accounting for all costs, including opportunity costs.

Question 17

Which of the following statements does NOT correctly characterize normal profit?
A) It is part of a firm's opportunity cost.
B) It is equal to a firm's total revenue minus its opportunity cost.
C) It is the average return for supplying entrepreneurial ability.
D) None of the above because all the statements correctly characterize normal profit.

Accepted Answer

Normal profit is not equal to a firm's total revenue minus its opportunity cost; rather, it is the minimum profit necessary for a company to remain competitive in the market, covering opportunity costs and ensuring the firm continues operations.

Question 18

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's profit as measured by an accountant for the year?
A) $80,000
B) $50,000
C) $30,000
D) -$10,000

Accepted Answer

An accountant measures profit as total revenue minus explicit costs. Heidi's explicit costs are $50,000 for wages and $20,000 for food, totaling $70,000. Her revenue is $100,000, so her profit is $100,000 - $70,000 = $30,000.

Question 19

A normal profit is
A) the revenue remaining after all opportunity costs have been paid.
B) the profit a firm makes each year.
C) the average return for entrepreneurship.
D) part of the implicit rental rate of capital.

Accepted Answer

The answer of A normal profit is
A) the revenue remaining...

Question 20

The return that an entrepreneur can expect to earn, on average, is called
A) profit.
B) normal profit.
C) economic profit.
D) accounting profit.

Accepted Answer

Normal profit is the average return an entrepreneur can expect to earn, covering opportunity costs and ensuring the business is sustainable without earning excess profits.

Quiz 10: Organizing Production

Joe quits his job as an insurance agent and opens his own sporting goods store. If his profits as measured by his accountant are greater than zero, then

Sue owns a baking company. The company's total revenue for a month is $4000. The monthly costs of resources bought in the market and of resources owned by the firm are $2000 and monthly costs of resources supplied by the owner are $1000. Sue's economic profit for the month is equal to

Economic profit is the difference between total revenue and the

A normal profit for a self-employed entrepreneur is I. an opportunity cost. II) part of the implicit rental rate of the funds invested in the business.

Ed is a freelance writer who could work for a newspaper at $25,000 a year but instead works for himself for $41,000 a year. His only business expenses are $1,000 for writing materials and $12,000 for rent. Ed's normal profit is $1,000. Ed's economic profit from working as a freelance writer is

Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. The typical payment for Lucinda's work is

The average return for supplying entrepreneurial ability is the entrepreneur's

If economic profit is equal to zero, then

Suppose Pippi buys an oven for her pizza parlor for $100,000. Pippi's pizza tasted so pitiful she went out of business 12 months later. She was able to sell the pizza oven for $75,000. This decrease in the value of the oven is

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's economic profit for the year?

Economic profit is

Flora's Flower Shop bought a new van for $23,000. Today, the market price of this van is $11,000. The economic depreciation of the van is

Among the opportunity costs of a firm are all of the following EXCEPT

An economic profit for a self-employed entrepreneur is

Which of the following statements does NOT correctly characterize normal profit?

A normal profit is

The return that an entrepreneur can expect to earn, on average, is called