Question 1

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year.What are the annual implicit costs for the firm described above?
A)$450,000.
B)$160,000.
C)$90,000.
D)$360,000.

Accepted Answer

Implicit costs include the income the owner/manager could have earned by working elsewhere, which is $90,000.

Question 2

$\begin{array}{l}
\begin{array} { | l | r | } 
\hline \text { Assume an apple farmer incurs the following costs and revenues: } \
\hline \text { Fertilizer: } & \$ 200 \
\hline \text { Seeds: } & \$ 75 \
\hline \text { Water: } & \$ 250 \
\hline \text { Wages: } & \$ 750 \
\hline \text { Property taxes: } & \$ 600 \
\hline \text { Interest payments on borrowed funds: } & \$ 1,200 \
\hline \text { Sales of apples: } & \$ 4,000 \
\hline
\end{array}\
\text { Table } 22.1
\end{array}$ Suppose the entrepreneur could earn $800 as an employee elsewhere.This means the entrepreneur is earning
A)Breakeven profits.
B)Economic losses.
C)Economic profits.
D)Accounting losses.

Accepted Answer

The answer of \(\begin{array}{l}
\begin{array} { | l | r |...

Question 3

Market structure is determined by the
A)Annual revenue, costs, and profits for an industry.
B)Number and relative size of the firms in an industry.
C)Amount of compensation given to the CEOs.
D)Price charged for the good or service produced.

Accepted Answer

Market structure is determined by the number and relative size of firms in an industry. This includes factors such as market share, barriers to entry, and degree of competition. Annual revenue, costs, and profits for an industry may provide insight into the current state of the market, but do not determine the market structure itself. The amount of compensation given to CEOs and the price charged for a good or service produced may be influenced by the market structure, but they do not determine it.

Question 4

The $600 paid in property taxes counts as
A)An implicit cost.
B)A normal cost.
C)A variable cost.
D)An explicit cost.

Accepted Answer

Property taxes are a mandatory expense that is directly incurred by owning property and therefore qualify as an explicit cost.

Question 5

Perfect competition is a situation in which
A)Every year, owners are likely to earn economic profits.
B)Every year, owners are likely to earn economic losses.
C)There are many firms and several buyers or sellers have market power.
D)There are many firms and no buyer or seller has market power.

Accepted Answer

Perfect competition is a market structure where numerous small firms produce identical products and no individual firm has the power to affect the market price. In other words, no buyer or seller has market power. Therefore, option D is the correct answer. Option A and B are incorrect because in perfect competition, firms earn only normal profits in the long run. Option C is also incorrect because if any buyer or seller has market power, it is not a situation of perfect competition.

Question 6

Assuming the entrepreneur does not pay herself, the $1,000 she could earn as an employee elsewhere is considered
A)An implicit cost.
B)An explicit cost.
C)A fixed cost.
D)A variable cost.

Accepted Answer

The $1,000 that the entrepreneur could earn as an employee elsewhere is considered an implicit cost because it represents the opportunity cost of entrepreneurship. This cost is not reflected in accounting records, but it is relevant for economic decision making because it represents the value of the next best alternative that the entrepreneur gave up in order to pursue entrepreneurship.

Question 7

The perfectly competitive market structure includes all of the following except
A)Many firms.
B)Identical products.
C)Large advertising budgets.
D)Low entry barriers.

Accepted Answer

In a perfectly competitive market structure, firms are price takers and cannot differentiate their products through advertising or branding. Therefore, option C (large advertising budgets) is not a part of the characteristics of a perfectly competitive market structure.

Question 8

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year.What are the annual explicit costs for the firm described above?
A)$450,000.
B)$160,000.
C)$90,000.
D)$360,000.

Accepted Answer

Explicit costs are the direct, out-of-pocket payments for expenses. For this firm, they include wages and salaries ($200,000), materials ($75,000), new equipment ($30,000), rented property ($20,000), and interest costs ($35,000), totaling $360,000.

Question 9

In which of the following types of markets does a single firm have the most market power?
A)Perfect competition.
B)Monopolistic competition.
C)Oligopoly.
D)Monopoly.

Accepted Answer

In a monopoly, there is only one firm that controls the entire market, so it has complete market power.

Question 10

If a firm can change market prices by altering its output, then it
A)Has market power.
B)Faces a horizontal demand curve.
C)Is a price taker.
D)Is a competitive firm.

Accepted Answer

A firm with the ability to change market prices is said to have market power, meaning it has some degree of control over the market. This is in contrast to a competitive firm, which is a price taker and has no ability to affect the market price. The fact that the firm can alter its output indicates that it faces a downward sloping demand curve, rather than a horizontal one (which would be faced by a perfectly competitive firm).

Question 11

Lashondra is the owner/operator of an interior design firm.Last year she earned $400,000 in total revenue.Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources).During the year she received offers to work for other design firms.One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year.Lashondra's economic profit is equal to
A)-$50,000.
B)$70,000.
C)$0.
D)$200,000.

Accepted Answer

First, we need to calculate Lashondra's total explicit and implicit costs. Her explicit costs were $200,000, but she also had an opportunity cost of not accepting the other job offers. Therefore, her implicit costs were either $120,000 or $130,000 (depending on which offer she would have accepted). So her total costs were either $320,000 or $330,000.

Next, we need to calculate her economic profit. Economic profit is total revenue minus total costs (explicit and implicit). So:

- If her total costs were $320,000: Economic profit = $400,000 - $320,000 = $80,000
- If her total costs were $330,000: Economic profit = $400,000 - $330,000 = $70,000

Therefore, Lashondra's economic profit is either $80,000 or $70,000, depending on which job offer she would have accepted. However, since the question asks for the economic profit, we choose the highest number which is B)$70,000.

Question 12

Entrepreneurship
A)Always involves greater rewards than risks.
B)Can result in economic losses.
C)Cannot earn an economic profit.
D)Occurs in small businesses, but not large corporations.

Accepted Answer

Entrepreneurship involves taking risks in order to start a new business or venture. While the potential for greater rewards does exist, there is also the possibility of economic losses, making answer choice B the most accurate. Choices A, C, and D are all incorrect as entrepreneurship does not always result in greater rewards, can earn an economic profit, and can occur in both small and large businesses.

Question 13

Adam Weed is the owner/operator of a flower shop.Last year he earned $250,000 in total revenue.His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources).During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year.Which of the following is true about Adam's accounting and economic profit?
A)Accounting profit = $75,000; economic profit = $0.
B)Accounting profit = $175,000; economic profit = $75,000.
C)Accounting profit = $75,000; economic profit = negative $100,000.
D)Accounting profit = $0; economic profit = negative $75,000.

Accepted Answer

Accounting profit is calculated as total revenue minus explicit costs, which is $250,000 - $175,000 = $75,000. Economic profit takes into account both explicit and implicit costs (opportunity costs), which in this case includes the $75,000 he could have earned working elsewhere. Thus, economic profit is $75,000 (accounting profit) - $75,000 (opportunity cost) = $0.

Question 14

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year.What is the accounting profit for the firm described above?
A)-$90,000.
B)$0.
C)$90,000.
D)$200,000.

Accepted Answer

The answer of Suppose a firm has an annual budget...

Question 15

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year.To receive a normal profit, the firm described above would have to
A)Experience $10,000 less in cost.
B)Receive $90,000 more in revenue.
C)Receive $10,000 more in revenue.
D)Do nothing since it already earns a normal profit.

Accepted Answer

To receive a normal profit, the firm must cover all its explicit and implicit costs. The explicit costs include wages and salaries ($200,000), materials ($75,000), new equipment ($30,000), rented property ($20,000), and interest costs ($35,000), totaling $360,000. The implicit cost is the owner/manager's forgone salary of $90,000. Therefore, the total cost is $450,000 ($360,000 + $90,000). Since the firm earns revenues of $360,000, it needs $90,000 more in revenue to cover all costs and achieve a normal profit.

Question 16

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above?
A)$450,000.
B)$120,000.
C)$90,000.
D)$360,000.

Accepted Answer

The annual economic costs for the firm would be the total expenses incurred by the firm plus the opportunity cost of the owner/manager's time.

Total expenses incurred by the firm:
Wages and salaries = $200,000
Materials = $75,000
New equipment = $30,000
Rented property = $20,000
Interest costs = $35,000
Total = $360,000

Opportunity cost of owner/manager's time = $90,000

Total economic costs = $360,000 + $90,000 = $450,000

Question 17

A monopoly occurs when
A)There is only one producer of a good or service.
B)There is only one buyer of a good or service.
C)Owners take on additional risk and earn huge profits.
D)Companies become greedy and raise the price of a good or service.

Accepted Answer

A monopoly occurs when there is only one producer of a good or service, meaning that there are no close substitutes and the producer has control over the price. This can lead to prices being higher than they would be in a competitive market, as the monopolist has no competition to drive prices down.

Question 18

When a producer can control the market price for the good it sells, the producer
A)Is an entrepreneur.
B)Is certain to make a profit.
C)Has market power.
D)Is a perfectly competitive firm.

Accepted Answer

If a producer can control the market price for the good it sells, it means that the producer has market power. This may be due to factors such as having a monopoly in the market or having significant control over the supply of the good. This does not guarantee a profit or make the firm perfectly competitive.

Question 19

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital.The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere.The firm earns revenues of $360,000 per year. What is the economic profit for the firm described above?
A)-$90,000.
B)$0.
C)$90,000.
D)$200,000.

Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenues. Here, explicit costs include wages and salaries ($200,000), materials ($75,000), new equipment ($30,000), rented property ($20,000), and interest costs ($35,000), totaling $360,000. The implicit cost is the income the owner could have earned elsewhere, which is $90,000. Therefore, total costs are $450,000 ($360,000 + $90,000). Since the firm earns revenues of $360,000, the economic profit is $360,000 - $450,000 = -$90,000.

Question 20

Megan used to work at the local pizzeria for $15,000 per year but quit to start her own deli.To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest).Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000.She asked her dad the accountant and her mom the economist to calculate her annual profit for her.
A)Dad says she lost $11,000 and Mom says she lost $26,000.
B)Dad says her profit is $31,000 and Mom says her profit is $16,600.
C)Dad says her profit is $9,000 and Mom says she lost $6,000.
D)Dad says her profit is $19,000 and Mom says her profit is $2,400.

Accepted Answer

- Megan's revenue was $50,000.
- Her expenses were:
  - Cost of ingredients: $25,000
  - Monthly rent: $500/month x 12 months = $6,000
  - Total expenses: $25,000 + $6,000 = $31,000
- Therefore, her profit was:
  - Revenue - expenses = $50,000 - $31,000 = $19,000
- Megan also earned interest on her inheritance:
  - $20,000 x 8% = $1,600
- Therefore, her total income was $19,000 + $1,600 = $20,600
- Megan's dad's calculation must have excluded the interest earned, leading to an incorrect calculation of a loss.
- Megan's mom's calculation must have included expenses that were not mentioned in the problem, leading to an incorrect calculation of a larger loss.

Quiz 8: The Competitive Firm

Market structure is determined by the

The $600 paid in property taxes counts as

Perfect competition is a situation in which

Assuming the entrepreneur does not pay herself, the $1,000 she could earn as an employee elsewhere is considered

The perfectly competitive market structure includes all of the following except

In which of the following types of markets does a single firm have the most market power?

If a firm can change market prices by altering its output, then it

Entrepreneurship

A monopoly occurs when

When a producer can control the market price for the good it sells, the producer