The Economic Way of Thinking, 13e (Heyne)
Chapter 7 Profit and Loss
1) “Total revenue minus total cost” is
A) an incorrect definition of profit.
B) the correct definition of profit.
C) the economist’s definition of profit.
D) the government’s definition of profit.
E) the most common definition of profit.
2) The accountant’s definition of profits, or the definition used for tax purposes, is not wholly
satisfactory from the economist’s point of view because
A) accountants are paid by business firms and consequently tend to exaggerate the size of profits.
B) accountants deal with empirical data while economists are interested in theoretical
explanations.
C) accountants tend to minimize profits in order to avoid the payment of unnecessary taxes.
D) accounting costs do not include the entrepreneur’s opportunity costs.
3) When total costs are greater than total revenue,
A) fixed costs must be high.
B) a firm is suffering losses.
C) a firm should shut down immediately.
D) the firm must be producing on the elastic range of its demand curve.
4) Interest is to saver as
A) interest is to debtor.
B) profit is to entrepreneur.
C) tuition is to student.
D) commission is to committee.
5) From the economic point of view, profit is
A) a four-letter word.
B) the same as loss.
C) the result of uncertainty.
D) a sign of economic injustice.
E) none of the above.
6) From the economic point of view, what’s worse, profit or loss?
A) Profit
B) Loss
C) They are equally bad.
D) The question is meaningless as stated.
7) If profit is commonly defined as “total revenue minus total cost,” then
A) there is no way to measure losses.
B) a negative profit implies a loss.
C) losses can only be measured as “total cost minus total revenue.”
D) profits must always equal losses.
8) Accountants define profit as “total revenue minus total cost,”
A) and so do economists.
B) but economists define profit as net revenue minus total cost.
C) but economists define profit as net cost minus total revenue.
D) but economists define profit as total cost minus total revenue.
E) but economists have long abandoned the concept of profit.
9) How does the economist’s measure of profit differ from the accountant’s measure?
A) Economists subtract total revenue from total cost; accountants do the opposite.
B) Economists subtract total costs from total revenue; accountants do the opposite.
C) Economists consider more sources of monetary revenue than accountants do.
D) Economists include all opportunity costs, accountants don’t.
E) There is no difference between the two measures.
10) Typically a firm’s economic profit will be
A) greater than its accounting profit.
B) less than its accounting profit.
C) equal to its accounting profit.
D) equal to its accounting profit minus its tax liability.
E) equal to its accounting profit plus the market value of any unsold inventory.
11) Pick the false statement.
A) It is possible for economic profit to be equal to accounting profit.
B) It is possible for economic profit to be greater than accounting profit.
C) It is possible for economic profit to be less than accounting profit.
D) Economic profit can only occur under conditions of uncertainty.
12) Pick the true statement.
A) It is possible for economic profit to be greater than accounting profit.
B) Accounting profit includes both the implicit and explicit costs of production.
C) Accounting profit is always greater than economic profit.
D) None of the above is a true statement.
13) If a professor gives up her job to open a shoe store, which of the following costs would an
accountant tend to ignore?
A) The $1,500 per month lease for the shoe store.
B) The $150 per month electricity bill.
C) The $4,000 per month of income forgone by not being employed as a professor.
D) The $200 business license, which, of course, is a sunk cost.
14) If an economist were to consult for a major Fortune 500 company, and he reached the
conclusion the firm was making zero economic profit,
A) the firm’s accounting profit would be greater than zero.
B) the firm should go out of business immediately.
C) the firm’s accounting profits would be lower.
D) the economist’s numbers were probably wrong because economic profit can never be zero.
15) Ann Trepreneur was formerly a landlord, renting her building for $1,200 a month. She now
uses her building for her own florist shop. Pick the true statement.
A) The building costs Ann $1,200 per month.
B) Ann incurs no opportunity cost on the building.
C) Ann uses the building as a free good.
D) None of the above is true.
16) Use the economic way of thinking to complete the following statement: An entrepreneur who
owns his own building
A) enjoys the building as a free good.
B) sacrifices rental income he could have been earned on the building.
C) enjoys lower costs than other entrepreneurs who choose to rent buildings from others.
D) enjoys larger economic profits compared to other entrepreneurs who choose to rent buildings
from others.
17) Samantha decides to withdraw $10,000 from her savings account and invest it all in the stock
market. Her total economic costs
A) equal $10,000.
B) are independent of the interest she enjoyed in her savings account.
C) are affected by the interest she enjoyed in her savings account.
D) are determined solely by the commission she is charged for the purchase of stock.
18) Mr. Jones, an elderly man living on his retirement, pulls $100,000 from certificates of
deposit (CDs), which were returning an annual rate of return of 5%. He thinks the credit freeze is
over and stock markets are headed up, but ends up losing 40% in his first year of investing. What
was Mr. Jones’s rate of economic profit?
A) 5%
B) 35%
C) -35%
D) -40%
E) -45%
19) For years Hugh R. Riskee enjoyed an 11% annual return on his S&P 500 mutual fund index.
Last year he decided to sell his mutual fund, and invest it all in the Nasdaq 100 mutual fund
index, in which he enjoyed a 14% annual return. What percent below represents the rate of his
economic profit?
A) 3%
B) 11%
C) 14%
D) 17%
E) 25%
20) “My son is a smart entrepreneur. Rather than borrow money from others, he used his own
savings to start his music business, and thereby avoided paying interest on loans.” An economist
would respond by saying
A) “both you and your son are complete idiots.”
B) “it’s always good to avoid borrowing and paying interest.”
C) “nobody can avoid paying interest, not even your clever son.”
D) “your son might have avoided paying interest, but he also avoided earning interest.”
21) Which of the following would be included in the total costs of production when an
entrepreneur tries to compute her economic profit?
A) Foregone wages
B) Foregone interest
C) Foregone rent
D) All of the above.
E) None of the above.
22) When determining her accounting profit, an entrepreneur would include
A) her foregone wages.
B) her foregone interest.
C) her foregone rent.
D) all of the above.
E) none of the above.
23) Does the proprietor of a grocery store who owns the building in which his business is located
have lower costs than a grocery store proprietor who must pay rent for the building in which his
store is located?
A) No, because no two businesses will be exactly the same.
B) No, because the owner-proprietor loses the rent he could otherwise have been paid.
C) Yes, because he can afford to set lower percentage markups.
D) Yes, if the cost saving is not offset by higher expenses in other areas.
24) A physician who laid off her nurse and receptionist and performed their tasks herself would
probably
A) decrease her accounting profit but increase her economic profit.
B) decrease her profit from the economist’s point of view even if she increased her accounting
profit.
C) increase both her accounting and economic profit if her practice was a busy one.
D) wind up with lower labor costs unless the layoff greatly increased the demand for her
professional services.
E) work more efficiently in order to get everything done.
25) Why would a chain store sell some items, such as soda pop, below cost?
A) They are not interested always in maximizing profit.
B) They feel people need soda pop more than the other items in the store.
C) Pricing some items “below cost” might be an efficient strategy to maximize the store’s total
profit.
D) Because most firms can only enjoy profits by consistently selling all their items below cost.
26) If business losses are the result of uncertainty in the real world, then
A) business profits are too.
B) profits must equal losses in the short run.
C) profits must equal losses in the long run.
D) losses could be eliminated if we could eliminate uncertainty in the real world, but profits will
still remain.
27) “Loss” is another word for
A) profit.
B) negative profit.
C) cost.
D) exploitation.
28) An opportunity cost is
A) an opportunity lost.
B) only the explicit costs of an action.
C) only the costs a person can consciously articulate at the moment of deciding.
D) none of the above.
29) If a used-car dealer enjoys economic profits, then
A) as a group, its customers necessarily suffered a like amount in economic losses.
B) as a group, its customers were necessarily made worse off.
C) as a group, its competitors necessarily suffered economic losses.
D) all of the above are true.
E) none of the above is true.
30) If a used-car dealer suffers economic losses, then
A) as a group, its customers were necessarily made worse off.
B) as a group, its competitors necessarily enjoyed economic profits.
C) it must pass its losses onto its future customers.
D) none of the above is true.
31) Using the economic way of thinking, complete the following sentence: “One person’s profit
is
A) a sign of sinful activity.”
B) the result of uncertainty.”
C) only a matter of luck and chance.”
D) another person’s loss.”
32) Burger Queen enjoyed $1 million in profits last year. What does Burger Queen’s $1 million
in profits mean for its competitor, Burger Lord?
A) Nothing.
B) Burger Lord must have suffered $1 million in losses last year.
C) Burger Lord must have also enjoyed $1 million in profits last year.
D) Burger Queen is more efficient at serving its customers compared to Burger Lord.
33) When Exxon Mobil reports record profits of more than $10 billion per quarter, we know
A) other oil companies must be struggling.
B) consumers must be paying high prices at the pump.
C) consumers must have lost $10 billion in surplus.
D) all of the above.
E) none of the above follow from the information given.
34) ACME Steel made $68 million in profits last year selling its steel to the Cogswell Car
Corporation, which means
A) Cogswell Car Corp. also enjoyed $68 million in profits last year.
B) Cogswell Car Corp. also suffered a $68 million loss last year.
C) Cogswell Car Corp. also expected to profit from the deal.
D) Cogswell Car Corp. was acting inefficiently.
35) In the economic way of thinking, profit and loss can be eliminated only by
A) appropriate and effective price controls.
B) careful and detailed government regulation of business.
C) a total elimination of uncertainty.
D) taxation.
E) the confiscation of private property.
36) If losses are unavoidable in an uncertain world, then
A) profits are too.
B) profits are only the result of good luck.
C) profits are avoidable.
D) profits are the result of people acting with perfect information.
37) Which economy managed to eliminate economic profits and losses?
A) Socialist Cuba
B) Socialist China
C) Fascist Italy
D) Nazi Germany
E) None of the above.
38) When profits are the result of pure luck, they can be distinguished from profits attributable to
correct predictions by
A) asking the people who profited.
B) finding out whether the profits were earned through effort.
C) no known empirical criteria.
D) whether or not they were generally anticipated.
39) A social system could eliminate profits and losses if it could
A) eliminate greed and selfishness.
B) eliminate uncertainty.
C) fix all prices to reflect opportunity costs.
D) fix all prices to reflect the value of the labor embodied in goods.
E) tax all receipts above cost and redistribute them to firms unable to cover all their costs.
40) No firm’s total revenue could exceed its total opportunity costs if
A) all firms were price takers.
B) prices always cleared the market.
C) quantity demanded of every good equaled the quantity supplied.
D) the future were completely predictable.
E) there were no legal restrictions on entry into any industry.
41) The profits of business firms, defined as the difference between total revenue and total cost,
are not zero because
A) capitalists have a near monopoly over the means of production.
B) information is a scarce good.
C) the government defines some opportunity costs as revenue in order to increase tax receipts.
D) there would be no investment if firms did not earn positive profits.
42) Entrepreneurs are people who
A) accept ultimate responsibility for the projects they undertake.
B) are hired by others to manage business enterprises.
C) are hired by others to organize business enterprises.
D) own the resources used in the production process.
E) prefer a small chance for a large profit to a large chance for a small profit.
43) Entrepreneurs obtain control over the resources employed in the projects they undertake by
A) acquiring ownership through investment of their own funds.
B) borrowing funds with which to purchase the resources.
C) floating new issues of stock or bonds.
D) offering credible guarantees to owners of resources.
E) reinvesting the profits from previous successful projects.
44) Entrepreneurs engage in
A) arbitrage.
B) innovation.
C) imitation of other successful entrepreneurs.
D) all of the above.
45) Arbitrage means seeking profit by
A) buying high and selling low.
B) buying low and selling high.
C) either of the above.
D) neither of the above.
46) When ticket scalpers buy up hundreds of Chicago Cubs tickets the day tickets go on sale,
they are
A) behaving unethically.
B) hoping to buy high and sell low.
C) hoping to buy low and sell high.
D) ruining it for everyone else.
47) Entrepreneurs tend to have a comparative advantage in
A) arbitrage.
B) manipulating market prices.
C) stealing other people’s ideas.
D) selling their products below cost.
E) hiring others to act as residual claimants.
48) When economists say entrepreneurs have a comparative advantage in arbitrage activity, they
are saying
A) entrepreneurs are efficient at selling their products below cost.
B) entrepreneurs are efficient at selling their products at cost.
C) entrepreneurs are efficient at discovering opportunities to buy goods low and sell them at
higher prices.
D) entrepreneurs are efficient at resolving disputes of interest over titles to scarce property rights.
49) According to your authors, entrepreneurial innovation is similar to arbitrage because both
activities ultimately involve
A) obtaining inputs at relatively high prices and selling the output at lower prices.
B) obtaining inputs at relatively low prices and selling the output at higher prices.
C) the absence of uncertainty.
D) the presence of perfect and complete information.
50) From the economist’s point of view, dividends paid to stockholders are part of a corporation’s
costs
A) because taxes are paid on a corporation’s profits prior to the payment of dividends.
B) because they must be included in stockholders’ incomes for purposes of personal income
taxation.
C) insofar as they are contractual obligations.
D) insofar as they represent what funds invested in the corporation could have earned elsewhere.
51) It is important for a business firm to have a residual claimant because
A) income not claimed for accounting purposes is lost.
B) otherwise surplus profits would set off a process of “profit inflation.’
C) residuals account for as much as thirty percent of the wealth generated annually in the United
States.
D) some person must finally be liable for all corporate acts.
E) the claimant produces an effective incentive to consider all costs and benefits relevant to a
firm.
52) Which if the following is a key difference between profit-oriented institutions (such as small
businesses) and non-profit institutions (such as governments, hospitals, or schools)? Profit-
oriented institutions
A) are usually competitive rather than cooperative.
B) have a recognized residual claimant.
C) pursue private interests rather than the public interest.
D) rely on monetary incentives to secure the cooperation required for their functioning.
E) work through market processes.
53) The term capital in economic theory refers to
A) any privately owned resource.
B) bonds, stocks, and similar financial assets.
C) money available for lending or spending.
D) produced goods used to produce future goods.
E) savings out of income.
54) Which of the following is a form of capital for most economics professors?
A) Chalk
B) Paper
C) Calculators
D) All of the above
E) None of the above is capital, since economists define capital as liquid assets.
55) Economic theory defines capital as
A) anything that is scarce.
B) non-human resources.
C) produced resources used to produce future goods.
D) resources containing a positive opportunity cost.
E) stocks and bonds.
56) The assertion “capital is productive, but the ownership of capital is not,” assumes the
efficient use of resources
A) is different from technological efficiency and more difficult to achieve.
B) is no more likely under one ownership arrangement than another.
C) may be significantly affected by transferring ownership from private to public hands.
D) sometimes is affected by transferring ownership from public to private hands.
57) The pressure on corporate executives to maintain the market price of their company’s stock
gives them an incentive to
A) engage in insider trading.
B) ignore the political consequences of what they do.
C) produce goods subject to rapid obsolescence.
D) pursue short-run profits at the expense of the company’s long-run welfare.
E) take account in their decisions of the probable long-run effects.
58) The best time to purchase the stock of a corporation capable of generating large earnings in
the future is when
A) everyone expects its future earnings to be larger than they are now.
B) the price of the stock is lower than it has been in recent years.
C) the price of the stock is higher than it has been in recent years.
D) you alone expect its future earnings to be larger than they are now.
E) you know the corporation has already started to generate large earnings.
59) The size of a corporation, as measured by stockholders’ equity, depends primarily upon
A) current net revenue.
B) people’s expectations of future earnings.
C) the amount of capital invested in the corporation.
D) total sales (in dollar terms).
60) The effective operation of the U.S. economic system depends upon
A) high profits.
B) low profits.
C) stable profits.
D) the expectation of profits.