Chapter 13/The Costs of Production ? 865
39. Jane 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 Jane's economic profit from running her own business? a. $-55,000 b. $-5,000 c. $5,000 d. $20,000
ANS: C DIF: LOC: Costs of production MSC: Analytical
2 REF: 13-1 NAT: Analytic TOP: Economic profit
40. 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.
ANS: D DIF: LOC: Costs of production MSC: Analytical
2 REF: 13-1 NAT: Analytic TOP: Economic profit | Accounting profit
41. Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering
business. To invest in her factory, she withdrew $20,000 from her savings, which paid 3 percent interest, and borrowed $30,000 from her uncle, whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She asked Louis the accountant and Greg the economist to calculate her profit for her.
a. Louis says her costs are $25,900, and Greg says her costs are $66,500. b. Louis says her costs are $25,000, and Greg says her costs are $65,000. c. Louis says her profit is $66,500, and Greg says her costs are $66,500. d. Louis says her profit is $75,000, and Greg says her costs are $41,500.
ANS: A DIF: LOC: Costs of production MSC: Applicative
3 REF: 13-1 NAT: Analytic TOP: Economic profit | Accounting profit
42. Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering
business. To invest in her factory, she withdrew $20,000 from her savings, which paid 3 percent interest, and borrowed $30,000 from her uncle, whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She asked Louis the accountant and Greg the economist to calculate her profit for her.
a. Louis says her profit is $25,900, and Greg says her profit is $66,500. b. Louis says her profit is $35,000, and Greg says she lost $5,900. c. Louis says her profit is $34,100, and Greg says she lost $6,500. d. Louis says her profit is $34,100, and Greg says her profit is $34,100.
ANS: C DIF: LOC: Costs of production MSC: Applicative
3 REF: 13-1 NAT: Analytic TOP: Economic profit | Accounting profit
43. 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.
ANS: B DIF: LOC: Costs of production MSC: Interpretive
2 REF: 13-1 NAT: Analytic TOP: Economic profit | Accounting profit
866 ? Chapter 13/The Costs of Production
44. A difference between explicit and implicit costs is that
a. explicit costs are 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 are greater than explicit costs.
ANS: C DIF: LOC: Costs of production MSC: Interpretive
2 REF: 13-1 NAT: Analytic TOP: Explicit costs | Implicit costs
45. 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. Which of the following statements is correct regarding Katherine’s profits from selling flowers?
a. Katherine’s accounting profits are $100, and her economic profits are $25. b. Katherine’s accounting profits are $100, and her economic profits are $75. c. Katherine’s accounting profits are $25, and her economic profits are $100. d. Katherine’s accounting profits are $75, and her economic profits are $125.
ANS: A DIF: LOC: Costs of production MSC: Analytical
2 REF: 13-1 NAT: Analytic TOP: Economic profit | Accounting profit
46. 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. Which of the following statements is correct regarding Katherine’s profits from selling flowers?
a. Katherine’s accounting profits are $100, and her economic profits are $100. b. Katherine’s accounting profits are $100, and her economic profits are $0. c. Katherine’s accounting profits are $0, and her economic profits are $100. d. Katherine’s accounting profits are $0, and her economic profits are $-100.
ANS: B DIF: LOC: Costs of production MSC: Analytical
2 REF: 13-1 NAT: Analytic TOP: Economic profit | Accounting profit
47. A certain firm manufactures and sells computer chips. Last year it sold 2 million chips at a price of $10 per
chip. For last year, the firm's
a. accounting profit amounted to $20 million. b. economic profit amounted to $20 million. c. total revenue amounted to $20 million. d. explicit costs amounted to $20 million.
ANS: C DIF: LOC: Costs of production MSC: Applicative
1 REF: 13-1 NAT: Analytic TOP: Total revenue
48. Economic profit is equal to
a. total revenue minus the explicit cost of producing goods and services. b. total revenue minus the opportunity cost of producing goods and services. c. total revenue minus the accounting cost of producing goods and services.
d. average revenue minus the average cost of producing the last unit of a good or service.
ANS: B DIF: LOC: Costs of production MSC: Definitional
1 REF: 13-1 NAT: Analytic TOP: Economic profit
Chapter 13/The Costs of Production ? 867
49. 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.
ANS: B DIF: LOC: Costs of production MSC: Definitional
1 REF: 13-1 NAT: Analytic TOP: Accounting profit
50. 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.
ANS: A DIF: LOC: Costs of production MSC: Interpretive
2 REF: 13-1 NAT: Analytic TOP: Economic profit
51. 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.
ANS: A DIF: LOC: Costs of production MSC: Interpretive
2 REF: 13-1 NAT: Analytic TOP: Accounting profit
52. 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
ANS: A DIF: LOC: Costs of production MSC: Analytical
2 REF: 13-1 NAT: Analytic TOP: Accounting profit
53. When calculating a firm's profit, an economist will subtract only
a. explicit costs from total revenue since these are the only costs that can be measured explicitly. b. implicit costs from total revenue since 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 since these include both the implicit and explicit costs of
the firm.
d. the marginal cost since the cost of the next unit is the only relevant cost.
ANS: C DIF: LOC: Costs of production MSC: Definitional
2 REF: 13-1 NAT: Analytic TOP: Economic profit
54. Suppose that for a particular business there are no implicit opportunity 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.
ANS: B DIF: LOC: Costs of production MSC: Analytical
2 REF: 13-1 NAT: Analytic TOP: Accounting profit | Economic profit
868 ? Chapter 13/The Costs of Production
55. Total revenue minus both explicit and implicit costs is called
a. accounting profit. b. economic profit. c. average total cost.
d. None of the above is correct.
ANS: B DIF: LOC: Costs of production MSC: Definitional
1 REF: 13-1 NAT: Analytic TOP: Economic profit
56. Total revenue minus only explicit costs is called
a. accounting profit. b. economic profit. c. average total cost.
d. None of the above is correct.
ANS: A DIF: LOC: Costs of production MSC: Definitional
1 REF: 13-1 NAT: Analytic TOP: Economic profit
57. Total revenue minus only implicit costs is called
a. accounting profit. b. economic profit. c. opportunity cost.
d. None of the above is correct.
ANS: D DIF: LOC: Costs of production MSC: Definitional
1 REF: 13-1 NAT: Analytic TOP: Economic profit
58. Kevin quit his $65,000 a year corporate lawyer job to open up his own law practice. In Kevin's first year in
business his total revenue equaled $150,000. Kevin's explicit cost during the year totaled $85,000. Using the information from Kevin's first year in business, what is his economic profit? a. $0
b. $20,000 c. $65,000 d. $85,000
ANS: A DIF: LOC: Costs of production MSC: Applicative
2 REF: 13-1 NAT: Analytic TOP: Economic profit
59. The difference between accounting profit and economic profit relates to
a. the manner in which revenues are defined. b. how total revenue is calculated.
c. the manner in which costs are defined. d. the price of the good in the market.
ANS: C DIF: LOC: Costs of production MSC: Definitional
2 REF: 13-1 NAT: Analytic TOP: Economic profit
Scenario 13-1
Joe wants to start his own business, which will require that he purchase a factory that costs $400,000. Joe currently has $500,000 in the bank earning 3 percent interest per year.
60. Refer to Scenario 13-1. If Joe purchases the factory with his own money, what is the annual implicit
opportunity cost of purchasing the factory? a. $0 b. $3,000 c. $12,000 d. $15,000
ANS: C DIF: LOC: Costs of production MSC: Applicative
2 REF: 13-1 NAT: Analytic TOP: Implicit costs
Chapter 13/The Costs of Production ? 869
61. Refer to Scenario 13-1. Suppose Joe purchases the factory using $200,000 of his own money and $200,000
borrowed from a bank at an interest rate of 6 percent. What is Joe’s annual opportunity cost of purchasing the factory? a. $3,000 b. $6,000 c. $15,000 d. $18,000
ANS: D DIF: LOC: Costs of production MSC: Applicative
2 REF: 13-1 NAT: Analytic TOP: Opportunity cost
Scenario 13-2
Zach withdrew $400,000 out of his personal savings account and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per box. Also during the first year, the cookie business made monetary outlays of $9,000. You may assume that there is no opportunity cost to Zach’s time.
62. Refer to Scenario 13-2. Zach's accounting profit for the year was
a. $-494,000. b. $-6,000. c. $6,000. d. $12,000.
ANS: C DIF: LOC: Costs of production MSC: Applicative
2 REF: 13-1 NAT: Analytic TOP: Accounting profit
63. Refer to Scenario 13-2. Zach's economic profit for the year was
a. $-506,000. b. $-6,000. c. $3,000. d. $6,000.
ANS: B DIF: LOC: Costs of production MSC: Applicative
2 REF: 13-1 NAT: Analytic TOP: Economic profit
Scenario 13-3
Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also
maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat.
64. Refer to Scenario 13-3. What is the total opportunity cost of the day that Farmer Tony incurred for his spring
day in the field planting wheat? a. $130 b. $250 c. $300 d. $380
ANS: D DIF: LOC: Costs of production MSC: Analytical
2 REF: 13-1 NAT: Analytic TOP: Opportunity cost