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.
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.
b.
c.
d.
69. Total revenue minus only explicit costs is called
a.
b.
c.
d.
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.
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.
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.
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
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.
Scenario 13-1
Korie wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Korie
currently has $500,000 in the bank earning 3 percent interest per year.
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
79. Refer to Scenario 13-1. Suppose Korie purchases the factory using $200,000 of her own money and $200,000
borrowed from a bank at an interest rate of 6 percent. What is Korie’s annual opportunity cost of purchasing the factory?
a.
$3,000
b.
$6,000
c.
$15,000
d.
$18,000
Scenario 13-2
Chelsea wants to start her own Christmas ornament business. She can purchase a suitable factory that costs $100,000.
Chelsea currently has $150,000 in the bank earning 3 percent interest per year.
80. Refer to Scenario 13-2. Suppose Chelsea purchases the factory using her own money. What is Chelsea’s annual
implicit opportunity cost of purchasing the factory?
a.
$2,000
b.
$3,000
c.
$4,500
d.
$5,000
81. Refer to Scenario 13-2. Suppose Chelsea purchases the factory using $50,000 of her own money and $50,000
borrowed from a bank at an interest rate of 6 percent. What is Chelsea’s annual opportunity cost of purchasing the
factory?
a.
$2,000
b.
$3,000
c.
$4,500
d.
$5,000
Scenario 13-3
Kachina is a senior majoring in graphic design at Awesome University (AU). While she has been attending college,
Kachina started a computer consulting business to help senior citizens learn how to use their iPads. Kachina charges $25
per hour for her consulting services. She also works 5 hours a week for the Economics Department to maintain that
department’s Web page. The Economics Department pays Kachina $20 per hour.
82. Refer to Scenario 13–3. If Kachina can work additional hours at either job, what is the opportunity cost if she spends
one hour reading a novel?
a.
$20
b.
$25
c.
$100
d.
$125
83. Refer to Scenario 13–3. Which of the following statements is correct?
a.
Kachina should increase the number of hours she works for the Economics Department to make her income
comparable to her consulting business income.
b.
Kachina cannot be maximizing her well-being if she continues to work for the Economics Department.
c.
If Kachina chooses one hour at the beach with her friends rather than spend one more hour with a consulting
client, the forgone income of $25 is considered a cost of the choice to go to the beach.
d.
Both b) and c) are correct
Scenario 13-4
Suppose that Abdul opens a coffee shop. He receives a loan from a bank for $100,000. He withdraws $50,000 from his
personal savings account. The interest rate on the loan is 8%, and the interest rate on his savings account is 2%.
84. Refer to Scenario 13–4. Abdul’s annual explicit cost of capital is
a.
$8,000.
b.
$4,000.
c.
$2,000.
d.
$1,000.
85. Refer to Scenario 13–4. Abdul’s annual implicit cost of capital is
a.
$8,000.
b.
$4,000.
c.
$2,000.
d.
$1,000.
Scenario 13-5
Suppose that Emily opens a restaurant. She receives a loan from a bank for $200,000. She withdraws $100,000 from her
personal savings account. The interest rate on the loan is 6%, and the interest rate on her savings account is 2%.
86. Refer to Scenario 13–5. Emily’s annual explicit cost of capital is
a.
$2,000.
b.
$4,000.
c.
$12,000.
d.
$14,000.
87. Refer to Scenario 13–5. Emily’s annual implicit cost of capital is
a.
$2,000.
b.
$4,000.
c.
$12,000.
d.
$14,000.
88. Refer to Scenario 13–5. Emily’s total opportunity cost of capital is
a.
$2,000.
b.
$4,000.
c.
$12,000.
d.
$14,000.
Scenario 13-6
Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a
consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva
has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva
charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130
worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce.
89. Refer to Scenario 13-6. What is the total opportunity cost of the day that Farmer Ziva spent in the field planting
lettuce?
a.
$130
b.
$250
c.
$300
d.
$380
90. Refer to Scenario 13-6. An economist would calculate Ziva’s total cost for the day of farming to equal
a.
$130.
b.
$250.
c.
$300.
d.
$380.
91. Refer to Scenario 13-6. Ziva’s accountant would calculate the total cost for the day of farming to equal
a.
$25.
b.
$130.
c.
$300.
d.
$380.
92. Refer to Scenario 13-6. Ziva’s accounting profit from farming equals
a.
$-80.
b.
$130.
c.
$170.
d.
$260.
93. Refer to Scenario 13-6. Ziva’s economic profit from farming equals
a.
$-130.
b.
$-80.
c.
$130.
d.
$170.
Scenario 13-7
Julia prepares tax returns and does bookkeeping. Last year her revenues from the tax and bookkeeping business were
$150,000, and her expenses for the business were $15,000. When she started her tax and bookkeeping business, Julia gave
up her supplemental job doing in-home pet sitting. She used to earn $10,000 per year from pet sitting. Assume that she
incurred no costs for her pet sitting business.
94. Refer to Scenario 13–7. Julia’s explicit costs are
a.
0.
b.
$10,000.
c.
$15,000.
d.
$25,000.
95. Refer to Scenario 13–7. Julia’s implicit costs are
a.
0.
b.
$10,000.
c.
$15,000.
d.
$25,000.
96. Refer to Scenario 13–7. Julia’s accounting profits are
a.
$160,000.
b.
$150,000.
c.
$135,000.
d.
$125,000.
97. Refer to Scenario 13–7. Julia’s economic profits are
a.
$160,000.
b.
$150,000.
c.
$135,000.
d.
$125,000.
Scenario 13-8
Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor.
Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the
opportunity cost of her labor. She can sell 300 glasses for $0.50 each.
98. Refer to Scenario 13–8. What are Wanda’s explicit costs per glass?
a.
$0.18
b.
$0.10
c.
$0.08
d.
$0.02
99. Refer to Scenario 13–8. What are Wanda’s implicit costs per glass?
a.
$0.18
b.
$0.10
c.
$0.08
d.
$0.02
100. Refer to Scenario 13–8. What are Wanda’s total economic costs per glass?
a.
$0.18
b.
$0.10
c.
$0.08
d.
$0.02
101. Refer to Scenario 13–8. What are Wanda’s total accounting profits?
a.
$150
b.
$126
c.
$96
d.
$24
102. Refer to Scenario 13–8. What are Wanda’s total economic profits?
a.
$150
b.
$126
c.
$96
d.
$54
Scenario 13-9
Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own
engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for
supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by
cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.
103. Refer to Scenario 13–9. Ellie’s annual implicit costs will equal
a.
$55,200.
b.
$75,200.
c.
$80,500.
d.
$165,700.
104. Refer to Scenario 13–9. Ellie’s annual accounting costs will equal
a.
$55,200.
b.
$75,200.
c.
$80,500.
d.
$165,700.
105. Refer to Scenario 13–9. Ellie’s annual economic costs will equal
a.
$55,200.
b.
$75,200.
c.
$80,500.
d.
$135,700.
106. Refer to Scenario 13–9. According to Ellie’s accountant, which of the following revenue totals will yield her
business $50,000 in profits?
a.
$55,200
b.
$105,200
c.
$132,500
d.
$185,700
107. Refer to Scenario 13–9. According to an economist, which of the following revenue totals will yield Ellie’s business
$50,000 in economic profits?
a.
$55,200
b.
$100,200
c.
$132,500
d.
$185,700
Scenario 13–10
Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an
hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each.
108. Refer to Scenario 13–10. An accountant would calculate the total cost for one photo frame to be
a.
$5.
b.
$10.
c.
$15.
d.
$25.
109. Refer to Scenario 13–10. An economist would calculate the total cost for one photo frame to be
a.
$5.
b.
$10.
c.
$15.
d.
$25.
110. Refer to Scenario 13–10. An accountant would calculate the total profit for one photo frame to be
a.
$10.
b.
$15.
c.
$20.
d.
$25.
111. Refer to Scenario 13–10. An economist would calculate the total profit for one photo frame to be
a.
$10.
b.
$15.
c.
$20.
d.
$25.
Scenario 13–11
Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30 minutes. He is semi-
retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for $20 each.
112. Refer to Scenario 13–11. The explicit cost for one birdhouse is
a.
$4.
b.
$5.
c.
$8.
d.
$9.
113. Refer to Scenario 13–11. The implicit cost for one birdhouse is
a.
$4.
b.
$5.
c.
$8.
d.
$9.
114. Refer to Scenario 13–11. An accountant would calculate the total cost for one birdhouse to be
a.
$5.
b.
$8.
c.
$9.
d.
$13.
115. Refer to Scenario 13–11. An economist would calculate the total cost for one birdhouse to be
a.
$5.
b.
$8.
c.
$9.
d.
$13.
116. Refer to Scenario 13–11. An accountant would calculate the total profit for one birdhouse to be
a.
$7.
b.
$11.
c.
$12.
d.
$15.
117. Refer to Scenario 13–11. An economist would calculate the total profit for one birdhouse to be
a.
$7.
b.
$11.
c.
$12.
d.
$15.
Scenario 13–12
Ariana withdrew $400,000 out of her personal savings account and used it to start her new Internet cafe. The savings
account pays 3 percent interest per year. During the first year of her business, Ariana sold 2,000 cups of coffee for $2.50
per cup and 4,000 hours of Internet time, also at $2.50 per hour. During the first year, the business made monetary outlays
of $9,000. You may assume that there is no opportunity cost to Ariana’s time.
118. Refer to Scenario 13–12. Ariana’s accounting profit for the year was
a.
$-394,000.
b.
$-6,000.
c.
$6,000.
d.
$12,000.
119. Refer to Scenario 13–12. Ariana’s economic profit for the year was
a.
$-394,000.
b.
$-6,000.
c.
$3,000.
d.
$6,000.
Scenario 13–13
Christine is an artist who creates custom cookie jars. Her annual revenue from selling the cookie jars is $90,000. The
annual explicit costs of the materials used to make the cookie jars are $54,000.
120. Refer to Scenario 13–13. Christine used $5,000 from her personal savings account to buy pottery tools for her
business. The savings account paid 1% annual interest. What is Christine’s annual opportunity cost of the financial capital
that she invested in her business?
a.
$5
b.
$50
c.
$100
d.
$200
121. Refer to Scenario 13–13. Christine could earn $6,000 per year preparing taxes. In calculating the economic profit of
her cookie jar business, the $6,000 that Christine gives up is counted as part of her business’s
a.
total revenue.
b.
explicit costs.
c.
implicit costs.
d.
marginal costs.
122. Refer to Scenario 13–13. Christine used $5,000 from her personal savings account to buy pottery tools for her
business. The savings account paid 1% annual interest. Christine could earn $6,000 per year as a tax preparer. What is the
annual accounting profit of her cookie jar business?
a.
$36,000
b.
$35,950
c.
$30,000
d.
$29,950
123. Refer to Scenario 13–13. Christine used $5,000 from her personal savings account to buy pottery tools for her
business. The savings account paid 1% annual interest. Christine could earn $6,000 per year as a tax preparer. What is the
annual economic profit of her cookie jar business?
a.
$36,000
b.
$35,950
c.
$30,000
d.
$29,950
124. Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job
offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian‘s savings account paid 3 percent interest.
He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase
supplies and earned $50,000 in revenue during his first year. What are Sebastian’s implicit costs from running his own
business?
a.
$30,600
b.
$55,600
c.
$50,000
d.
$75,600
125. Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job
offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian‘s savings account paid 3 percent interest.
He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to purchase
supplies and earned $50,000 in revenue during his first year. Which of the following statements is correct?
a.
Sebastian’s total explicit costs are $15,400.
b.
Sebastian’s total implicit costs are $55,600.
c.
Sebastian’s accounting profit is $35,000.
d.
Sebastian’s economic profit is $4,600.
126. Sebastian decides to open a tree farm. When deciding to open his own business, he turned down two separate job
offers of $25,000 and $30,000 and withdrew $20,000 from his savings. Sebastian’s savings account paid 3 percent
interest. He also borrowed $20,000 from his brother, whom he pays 2 percent interest per year. He spent $15,000 to
purchase supplies and earned $50,000 in revenue during his first year. Which of the following statements is correct?
a.
Sebastian’s economic profit is $4,000, and his accounting profit is $34,600.
b.
Sebastian’s economic profit is $4,600, and his accounting profit is $35,000.
c.
Sebastian’s economic profit is -$16,000, and his accounting profit is $34,600.
d.
Sebastian’s economic profit is -$16,000, and his accounting profit is $14,600.