Question 1

Accounting profit takes into account explicit costs,but economic profit does not.

Accepted Answer

Accounting profit takes into account explicit costs such as wages, rent, and materials, while economic profit takes into account both explicit and implicit costs such as opportunity cost, foregone income, and the cost of owner's time and capital invested. Therefore, economic profit is always lower than accounting profit.

Question 2

Economic profits can be negative,even if accounting profits are positive.

Accepted Answer

Economic profits take into consideration the opportunity cost of resources used in a business, while accounting profits only consider explicit costs. Therefore, economic profits can be negative even if accounting profits are positive.

Question 3

A sunk cost should be ignored in decisions about future actions.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, so they should not be taken into account when making decisions about future actions. Only future costs and benefits should be considered in decision making.

Question 4

If the marginal cost of any activity is constant at $4,then at the optimal quantity of the activity,the marginal benefit will be $4.

Accepted Answer

In economic theory, the optimal quantity of an activity is reached when the marginal cost (MC) equals the marginal benefit (MB). Therefore, if the MC is constant at $4, the MB at the optimal quantity would also be $4.

Question 5

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-(Scenario: Betty's Cookie Shop)Use Scenario: Betty's Cookie Shop.Betty's implicit and explicit costs are equal to:

Accepted Answer

Betty's explicit costs include paying her employees ($10/hour * 500 hours/employee * 5 employees) = $25,000 and the cost of equipment and raw materials ($75,000). Therefore, her explicit costs are $25,000 + $75,000 = $100,000. 
Betty's implicit costs include the opportunity cost of not taking the $100,000 job offer from another company and the opportunity cost of not selling her cookie shop for $150,000. Therefore, her implicit costs are $100,000 + $150,000 = $250,000. 
So, her total costs (explicit + implicit) are $100,000 + $250,000 = $350,000. Therefore, the answer is C.

Question 6

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-(Scenario: Betty's Cookie Shop)Use Scenario: Betty's Cookie Shop.Betty's explicit costs are equal to:

Accepted Answer

The answer of Use the following to answer questions :
Scenario:...

Question 7

Anytime the marginal benefit of an activity is greater than zero,more activity should be undertaken.

Accepted Answer

If the marginal benefit of an activity is greater than zero but less than the marginal cost, additional activity should not be undertaken because the cost outweighs the benefit.

Question 8

As George ate pizza during one recent outing,he found that he enjoyed each additional slice less and less.This implies that his marginal benefit was:

Accepted Answer

Marginal benefit refers to the additional satisfaction or utility that a consumer derives from consuming one more unit of a good or service. In this case, as George ate each additional slice of pizza, he enjoyed it less and less, indicating that the marginal benefit was decreasing.

Question 9

Economic profits are calculated by:

Accepted Answer

Economic profits take into account both explicit costs (such as rent and wages) and implicit costs (such as the opportunity cost of using the owner's own resources). Therefore, economic profits are calculated by taking the difference between total revenue and the sum of explicit and implicit costs.

Question 10

In cities,a kilometre of road lane may cost $30 million or more,while in rural areas,a kilometre of road lane may cost only $5 million.This means that there should be more road lanes in rural areas than in urban areas.

Accepted Answer

The cost of constructing road lanes does not determine the number of lanes needed; urban areas often require more lanes due to higher traffic density and demand, despite higher costs.

Question 11

Marginal analysis should be used in "either-or" decisions.

Accepted Answer

Marginal analysis is best used for decisions that involve making small changes, such as producing one more unit of a product, rather than for "either-or" decisions, which typically require a different approach such as cost-benefit analysis.

Question 12

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-If marginal costs remain constant,the marginal cost curve is:

Accepted Answer

Since the scenario states that marginal costs remain constant, the marginal cost curve will be horizontal.

Question 13

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-(Scenario: Betty's Cookie Shop)Use Scenario: Betty's Cookie Shop.Given the information provided,Betty's implicit costs are:

Accepted Answer

Betty's implicit costs are the opportunity costs of not accepting the job offer and not selling her cookie shop. Her implicit costs include the salary she could have earned elsewhere and the interest she forgoes by not selling her shop and putting the money in the bank.

Question 14

The government should spend whatever amount is necessary to save a life.

Accepted Answer

While saving lives is crucial, governments must balance spending on life-saving measures with other essential services and fiscal responsibility. Unlimited spending on one area can lead to neglect of other important sectors and unsustainable debt.

Question 15

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-If the marginal cost curve is upward-sloping,as output increases,marginal costs will:

Accepted Answer

According to the scenario, Betty pays her employees $10 per hour and her costs of equipment and raw materials add up to $75,000. This means that her total fixed costs are $75,000 + ($10/hour x 500 hours/employee x 5 employees) = $125,000. Since the cost to produce each cookie is $1, this is also equivalent to Betty's average variable cost. Given that her total cost curve is the sum of her fixed costs and variable costs, it is upward-sloping. Therefore, as output increases, her marginal costs will also increase.

Question 16

Use the following to answer questions :
Scenario: Betty's Cookie Shop
Betty runs a cookie shop where she sells cookies for $1 each.She employs five people,each of whom worked a total of 500 hours last year;she paid them $10 per hour.Her costs of equipment and raw materials add up to $75 000.Her business ability is legendary,and other companies have offered to pay Betty $100 000 to come to work for them.She also knows she could sell her cookie shop for $150 000.The bank in town pays an annual interest rate of 3% on all funds deposited with it.
-(Scenario: Betty's Cookie Shop)Use Scenario: Betty's Cookie Shop.Betty is trying to decide at what point she should stop selling cookies,and she knows that she cannot change the price of a cookie.She should stop selling cookies if her:

Accepted Answer

Betty should stop selling cookies if her implicit costs (opportunity costs) are greater than her accounting profits, as this indicates she could earn more by pursuing other opportunities.

Question 17

An "either-or" decision is a choice between two activities.

Accepted Answer

An "either-or" decision is a choice between two options or activities.

Question 18

It is not possible to earn an economic profit without also earning an accounting profit.

Accepted Answer

Economic profit takes into account both explicit (accounting) costs and implicit (opportunity) costs, whereas accounting profit only considers explicit costs. Therefore, if a firm is earning an economic profit, it must also be covering all its explicit costs, thus earning an accounting profit.

Question 19

Sara spends $25 for an all-day ticket to an amusement park.After one ride,it begins to rain,and she wishes she had never come.Since she has already paid for her ticket,she should stay at the amusement park until it closes or she has wasted her $25.

Accepted Answer

The $25 is a sunk cost, meaning it's already spent and cannot be recovered. Staying at the amusement park solely to justify the expense, despite not enjoying it due to the rain, does not change the fact that the money is already spent. Decisions should be based on current and future benefits, not past costs.

Question 20

Since they have already paid for their tickets,it does not make economic sense for fans to leave before a game is finished.

Accepted Answer

This is an example of the sunk cost fallacy. The money spent on tickets is a sunk cost and should not influence the decision to stay or leave; the decision should be based on the current and future value or enjoyment of staying at the game.

Quiz 9: Decision Making by Individuals and Firms