The Costs of Production 3203
37. Bubba is a shrimp fisherman who used $2,000 from his personal savings account to buy a boat
and equipment for his shrimp business. The savings account paid 2% interest. What is Bubba’s
annual opportunity cost of the financial capital that he invested in his business?
a. $20
b. $40
c. $200
d. $400
38. Bubba is a shrimp fisherman who could earn $5,000 as a fishing tour guide. Instead, he is a full–
time shrimp fisherman. In calculating the economic profit of his shrimp business, the $5,000 that
Bubba gave up is counted as part of the shrimp business’s
a. total revenue.
b. explicit costs.
c. implicit costs.
d. marginal costs.
3204 The Costs of Production
39. The value of a business owner‘s time is an example of
a. an opportunity cost.
b. a fixed cost.
c. an explicit cost.
d. total revenue.
40. An example of an opportunity cost that is also an implicit cost is
a. a lease payment.
b. the cost of raw materials.
c. the value of the business owner’s time.
d. All of the above are correct.
41. Which of the following statements is correct?
a. Opportunity costs equal explicit minus implicit costs.
b. Economists consider opportunity costs to be included in a firm’s total revenues.
c. Economists consider opportunity costs to be included in a firm’s costs of production.
d. All of the above are correct.
The Costs of Production 3205
42. Explicit costs
a. require an outlay of money by the firm.
b. include all of the firm‘s opportunity costs.
c. include the value of the business owner’s time.
d. Both b and c are correct.
43. An example of an explicit cost of production would be the
a. cost of forgone labor earnings for an entrepreneur.
b. lost opportunity to invest in capital markets when the money is invested in one‘s business.
c. lease payments for the land on which a firm’s factory stands.
d. Both a and c are correct.
3206 The Costs of Production
44. Patrice owns a travel agency. Her accountant most likely includes which of the following costs on
her financial statements?
a. wages Patrice could earn giving tennis lessons
b. dividends Patrice’s money was earning in the stock market before Patrice sold her stock and
leased the space for her travel agency
c. the cost of utilities for operating the storefront
d. Both b and c are correct.
45. Pete owns a shoe-shine business. His accountant most likely includes which of the following costs
on his financial statements?
(i) shoe polish
(ii) rent on the shoe stand
(iii) wages Pete could earn delivering newspapers
(iv) interest that Pete’s money was earning before he spent his savings to set up the shoe-
shine business
a. (i) only
b. (i) and (ii) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
The Costs of Production 3207
46. Katya owns a math-tutoring business. Her accountant most likely includes which of the following
costs on her financial statements?
(i) workbooks containing practice problems
(ii) rent for the storefront
(iii) wages Katya could earn as a bookkeeper
(iv) interest that Katya’s money was earning before she spent her savings to set up the
tutoring business
a. (i) only
b. (i) and (ii) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
47. Explicit costs
a. do not require an outlay of money by the firm.
b. enter into the accountant‘s measurement of a firm’s profit.
c. enter into the economist’s measurement of a firm’s profit.
d. Both b and c are correct.
3208 The Costs of Production
48. A difference between explicit and implicit costs is that
a. explicit costs must be greater than implicit costs.
b. explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do.
c. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.
d. implicit costs must be greater than explicit costs.
49. Which of the following would be an example of an implicit cost?
(i) forgone investment opportunities
(ii) wages of workers
(iii) raw materials costs
a. (i) only
b. (ii) only
c. (ii) and (iii) only
d. (i) and (iii) only
The Costs of Production 3209
50. Pete owns a shoe-shine business. Which of the following costs would be implicit costs?
(i) shoe polish
(ii) rent on the shoe stand
(iii) wages Pete could earn delivering newspapers
(iv) interest that Pete’s money was earning before he spent his savings to set up the
shoe-shine business
a. (i) and (ii) only
b. (iv) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
51. Frank owns a dog-grooming business. Which of the following costs would be implicit costs?
(i) dog shampoo
(ii) rent on the storefront
(iii) wages Frank could earn as a substitute elementary-school teacher
(iv) interest that Frank’s money was earning before he spent his savings to set up the dog–
grooming business
a. (i) and (ii) only
b. (iv) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
3210 The Costs of Production
52. Implicit costs
a. do not require an outlay of money by the firm.
b. do not enter into the economist‘s measurement of a firm’s profit.
c. are also known as variable costs.
d. are not part of an economist’s measurement of opportunity cost.
53. Which of the following is an example of an implicit cost?
(i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall
Street brokerage firm
(ii) interest paid on the firm‘s debt
(iii) rent paid by the firm to lease office space
a. (ii) and (iii) only
b. (i) and (iii) only
c. (i) only
d. (iii) only
The Costs of Production 3211
54. The amount of money that a wheat farmer could have earned if he had planted barley instead of
wheat is
a. an explicit cost.
b. an accounting cost
c. an implicit cost.
d. forgone accounting profit.
55. Which of the following is an example of an implicit cost?
a. salaries paid to owners who work for the firm
b. interest on money borrowed to finance equipment purchases
c. cash payments for raw materials
d. foregone rent on office space owned and used by the firm
3212 The Costs of Production
56. Foregone investment opportunities are an example of
a. an explicit cost.
b. an implicit cost.
c. revenues.
d. profits.
57. Jacqui decides to open her own business and earns $50,000 in accounting profit the first year.
When deciding to open her own business, she turned down three separate job offers with annual
salaries of $30,000, $40,000, and $45,000. What is Jacqui‘s economic profit from running her own
business?
a. $–55,000
b. $–5,000
c. $5,000
d. $20,000
The Costs of Production 3213
58. Bev is opening her own court-reporting business. She financed the business by withdrawing
money from her personal savings account. When she closed the account, the bank representative
mentioned that she would have earned $300 in interest next year. If Bev hadn’t opened her own
business, she would have earned a salary of $25,000. In her first year, Bev’s revenues were
$30,000. Which of the following statements is correct?
a. Bev’s total explicit costs are $25,300.
b. Bev’s total implicit costs are $300.
c. Bev’s accounting profits exceed her economic profits by $300.
d. Bev’s economic profit is $4,700.
59. Walter used to work as a high school teacher for $40,000 per year but quit in order to start his
own painting business. To invest in his painting business, he withdrew $20,000 from his savings,
which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent
interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter
asked Tyler the accountant and Greg the economist to calculate his painting business’s costs.
a. Tyler says his costs are $25,900, and Greg says his costs are $66,500.
b. Tyler says his costs are $25,000, and Greg says his costs are $65,000.
c. Tyler says his costs are $66,500, and Greg says his costs are $66,500.
d. Tyler says his costs are $75,000, and Greg says his costs are $41,500.
3214 The Costs of Production
60. Walter used to work as a high school teacher for $40,000 per year but quit in order to start his
own painting business. To invest in his painting business, he withdrew $20,000 from his savings,
which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent
interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter
asked Tyler the accountant and Greg the economist to calculate his painting business’s profit.
a. Tyler says his profit is $25,900, and Greg says his profit is $66,500.
b. Tyler says his profit is $35,000, and Greg says he lost $5,900.
c. Tyler says his profit is $34,100, and Greg says he lost $6,500.
d. Tyler says his profit is $34,100, and Greg says his profit is $34,100.
61. Which of the following statements is correct?
a. Assuming that explicit costs are positive, economic profit is greater than accounting profit.
b. Assuming that implicit costs are positive, accounting profit is greater than economic profit.
c. Assuming that explicit costs are positive, accounting profit is equal to economic profit.
d. Assuming that implicit costs are positive, economic profit is positive.
The Costs of Production 3215
62. Katherine gives piano lessons for $15 per hour. She also grows flowers, which she arranges and
sells at the local farmer’s market. One day she spends 5 hours planting $50 worth of seeds in her
garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer’s
market. Katherine’s accounting profits are
a. $100, and her economic profits are $25.
b. $100, and her economic profits are $75.
c. $25, and her economic profits are $100.
d. $75, and her economic profits are $125.
63. Katherine gives piano lessons for $20 per hour. She also grows flowers, which she arranges and
sells at the local farmer’s market. One day she spends 5 hours planting $50 worth of seeds in her
garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer’s
market. Katherine’s accounting profits are
a. $100, and her economic profits are $100.
b. $100, and her economic profits are $0.
c. $0, and her economic profits are $100.
d. $0, and her economic profits are $-100.
3216 The Costs of Production
64. The difference between accounting profit and economic profit is
a. explicit costs.
b. implicit costs.
c. total revenue.
d. marginal product.
65. Economic profit is equal to total revenue minus the
a. explicit cost of producing goods and services.
b. opportunity cost of producing goods and services.
c. accounting cost of producing goods and services.
d. implicit cost of producing goods and services.
66. Economic profit
a. will never exceed accounting profit.
b. is most often equal to accounting profit.
c. is always at least as large as accounting profit.
d. is a less complete measure of profitability than accounting profit.
The Costs of Production 3217
67. When calculating a firm’s profit, an economist will subtract only
a. explicit costs from total revenue because these are the only costs that can be measured
explicitly.
b. implicit costs from total revenue because these include both the costs that can be directly
measured as well as the costs that can be indirectly measured.
c. the opportunity costs from total revenue because these include both the implicit and explicit
costs of the firm.
d. the marginal cost because the cost of the next unit is the only relevant cost.
68. Total revenue minus both explicit and implicit costs is called
a. accounting profit.
b. economic profit.
c. average total cost.
d. total cost.
3218 The Costs of Production
69. Total revenue minus only explicit costs is called
a. accounting profit.
b. economic profit.
c. average total cost.
d. implicit profit.
70. Total revenue minus only implicit costs is called
a. accounting profit.
b. economic profit.
c. opportunity cost.
d. None of the above is correct.
The Costs of Production 3219
71. Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom’s first
year in business his total revenue equaled $150,000. Tom‘s explicit cost during the year totaled
$85,000. What is Tom’s economic profit for his first year in business?
a. $0
b. $20,000
c. $65,000
d. $85,000
72. The difference between accounting profit and economic profit relates to
a. the manner in which revenues are defined.
b. how marginal revenue is calculated.
c. the manner in which costs are defined.
d. the price of the good in the market.
3220 The Costs of Production
73. Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law
practice. In the first year of business she generated revenues of $347,000 and incurred explicit
costs of $163,000. Jane’s economic profit from her first year in her own practice is
a. –$39,000.
b. $124,000.
c. $163,000.
d. $184,000.
74. Accounting profit is equal to
a. marginal revenue minus marginal cost.
b. total revenue minus the explicit cost of producing goods and services.
c. total revenue minus the opportunity cost of producing goods and services.
d. average revenue minus the average cost of producing the last unit of a good or service.
The Costs of Production 3221
75. Which of the following expressions is correct?
a. accounting profit = total revenue – explicit costs
b. economic profit = total revenue – implicit costs
c. economic profit = total revenue – explicit costs
d. Both a and b are correct.
76. Which of the following expressions is correct?
a. accounting profit = economic profit + implicit costs
b. accounting profit = total revenue – implicit costs
c. economic profit = accounting profit + explicit costs
d. economic profit = total revenue – implicit costs
3222 The Costs of Production
77. Suppose that for a particular business there are no implicit costs. Then
a. accounting profit will be greater than economic profit.
b. accounting profit will be the same as economic profit.
c. accounting profit will be less than economic profit.
d. the relationship between accounting profit and economic profit cannot be determined without
more information.
78. Refer to Scenario 13-1. If Korie purchases the factory with her own money, what is the annual
implicit opportunity cost of purchasing the factory?
a. $0
b. $3,000
c. $12,000
d. $15,000