Question 1

Suppose Pippi buys an oven for her pizza parlor for $100,000. Pippi's pizza tasted so pitiful she went out of business 12 months later. She was able to sell the pizza oven for $75,000. This decrease in the value of the oven is
A) the total implicit rental rate on the oven.
B) an economic loss.
C) economic depreciation.
D) interest forgone.

Accepted Answer

The decrease in the value of the oven from $100,000 to $75,000 represents economic depreciation, which is a decrease in the value of an asset due to wear and tear or obsolescence. It is not the total implicit rental rate (A), which refers to the opportunity cost of owning an asset, nor is it interest forgone (D), which is the amount of interest that could have been earned on the money spent to purchase the oven. It is also not an economic loss (B), which would occur if the revenue earned from selling pizzas was less than the cost of all resources used to produce them, not just the oven.

Question 2

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's economic profit for the year?
A) $80,000
B) $50,000
C) $30,000
D) -$10,000

Accepted Answer

The answer of Heidi quit her job as a chef...

Question 3

Among the opportunity costs of a firm are all of the following EXCEPT
A) the owner's forgone wage.
B) costs of resources bought in markets, such as labor.
C) normal profits.
D) economic profits.

Accepted Answer

The answer of Among the opportunity costs of a firm...

Question 4

Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. The typical payment for Lucinda's work is ________.
A) all the revenue greater than her opportunity cost
B) all the revenue greater than the capital investment
C) a normal profit
D) an economic profit

Accepted Answer

Lucinda is a sole proprietor, meaning she owns and operates the business by herself. As the sole proprietor, she is responsible for all business decisions and risks. However, she is also entitled to a normal profit, which is the amount of revenue that surpasses her costs of production, including her opportunity cost. Since she is not incurring any additional capital investment (i.e. she is not taking on debt or securing investors), the typical payment for her work would be a normal profit.

Question 5

The return that an entrepreneur can expect to earn, on average, is called
A) profit.
B) normal profit.
C) economic profit.
D) accounting profit.

Accepted Answer

The answer of The return that an entrepreneur can expect...

Question 6

Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's costs for resources bought in the market equal
A) $70,000 per year.
B) $200,000 per year.
C) $330,000 per year.
D) $350,000 per year.

Accepted Answer

Sheila's costs for resources bought in the market are equal to the total costs minus the costs for labor and the opportunity cost of not renting out the building. 
Total costs = $230,000 (cost of goods sold) + $25,000 x 4 (employee salaries) = $330,000 
Opportunity cost = $20,000 (potential rent revenue) 
Total costs - labor costs - opportunity cost = $330,000 - ($25,000 x 4) - $20,000 = $170,000. 
Therefore, Sheila's costs for resources bought in the market equal $330,000 - $170,000 = $160,000 per year.

Question 7

Economic profit is
A) equal to the firm's total revenue minus its opportunity costs.
B) an opportunity cost of operating the firm.
C) equal to the firm's total revenue minus its normal profit.
D) the average return for supplying entrepreneurial ability.

Accepted Answer

The answer of Economic profit is
A) equal to the firm's...

Question 8

An economic profit for a self-employed entrepreneur is
A) an opportunity cost.
B) the same as the normal profit.
C) a profit over and above opportunity cost.
D) None of the above answers is correct.

Accepted Answer

Economic profit for a self-employed entrepreneur is the profit over and above opportunity cost, as it includes not only normal profit but also the opportunity cost of the resources used to generate that profit. Therefore, option C is the correct choice.

Question 9

Economic profit is the difference between total revenue and
A) the normal profit.
B) interest costs of production.
C) opportunity costs of production.
D) the costs of resources bought in markets.

Accepted Answer

Economic profit takes into account not only explicit costs (e.g. costs of resources bought in markets) but also implicit costs, such as opportunity costs of production. Therefore, economic profit is calculated by subtracting both explicit and implicit costs from total revenue. The normal profit (or normal return on investment) is already accounted for in explicit costs and is not considered in calculating economic profit. Interest costs are also only one type of explicit cost and do not encompass all the costs of production.

Question 10

A normal profit for a self-employed entrepreneur is I. an opportunity cost.
II) part of the implicit rental rate of the funds invested in the business.
A) only I
B) only II
C) both I and II
D) neither I nor II

Accepted Answer

The answer of A normal profit for a self-employed entrepreneur...

Question 11

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's profit as measured by an accountant for the year?
A) $80,000
B) $50,000
C) $30,000
D) -$10,000

Accepted Answer

To calculate Heidi's profit, we need to subtract her expenses from her revenue. Her revenue is $100,000. Her expenses are $50,000 for wages and $20,000 for food, for a total of $70,000. Therefore, her profit is $100,000 - $70,000 = $30,000. Choice C is the correct answer.

Question 12

Flora's Flower Shop bought a new van for $23,000. Today, the market price of this van is $11,000. The economic depreciation of the van is ________.
A) $23,000
B) $12,000
C) $11,000
D) $34,000

Accepted Answer

Economic depreciation refers to the decrease in the market value of an asset over time. In this case, the market price of the van has depreciated from $23,000 to $11,000, which is a decrease of $12,000. Therefore, the economic depreciation of the van is $12,000.

Question 13

A normal profit is
A) the revenue remaining after all opportunity costs have been paid.
B) the profit a firm makes each year.
C) the average return for entrepreneurship.
D) part of the implicit rental rate of capital.

Accepted Answer

The answer of A normal profit is
A) the revenue remaining...

Question 14

If economic profit is equal to zero, then
A) the entrepreneur's profit as measured by accountants is also equal to zero.
B) the entrepreneur's profit as measured by accountants must be less than zero.
C) the entrepreneur is earning only a normal profit.
D) The entrepreneur's profit cannot be determined based on the information given.

Accepted Answer

Economic profit equal to zero means that the entrepreneur is covering all their costs, including opportunity costs. This implies that the profit earned is just enough to cover what they could have earned in their next-best alternative. Therefore, the entrepreneur is earning only a normal profit.

Question 15

Joe quits his job as an insurance agent and opens his own sporting goods store. If his profits as measured by his accountant are greater than zero, then
A) he made a good move because he is earning above normal profits.
B) his economic profit must be greater than zero.
C) his opportunity costs must be zero.
D) There is not enough information to determine his economic profit, if any.

Accepted Answer

The fact that his profits as measured by his accountant are greater than zero only tells us that his accounting profit is positive. It does not necessarily mean that his economic profit (which includes opportunity costs) is positive. The answer could be determined if we had more information about his opportunity costs.

Question 16

Ed is a freelance writer who could work for a newspaper at $25,000 a year but instead works for himself for $41,000 a year. His only business expenses are $1,000 for writing materials and $12,000 for rent. Ed's normal profit is $1,000. Ed's economic profit from working as a freelance writer is
A) $1,000.
B) $2,000.
C) $15,000.
D) $25,000.

Accepted Answer

The answer of Ed is a freelance writer who could...

Question 17

Sue owns a baking company. The company's total revenue for a month is $4000. The monthly costs of resources bought in the market and of resources owned by the firm are $2000 and monthly costs of resources supplied by the owner are $1000. Sue's economic profit for the month is equal to
A) $4000.
B) $3000.
C) $2000.
D) $1000.

Accepted Answer

Sue's total costs for the month are $3000 ($2000 for resources bought + $1000 for resources supplied by the owner). Therefore, her economic profit is $4000 - $3000 = $1000.

Question 18

The average return for supplying entrepreneurial ability is the entrepreneur's
A) accounting profit.
B) normal profit.
C) explicit profit.
D) economic profit.

Accepted Answer

Normal profit represents the entrepreneur's opportunity cost or the return the entrepreneur could have earned if they had chosen an alternative use of their resources. It is the minimum amount of profit required to keep the entrepreneur engaged in the business. Economic profit (D) takes into account both explicit and implicit costs and represents the actual profit earned by the entrepreneur. Accounting profit (A) only considers revenue and explicit costs, ignoring implicit costs, and is an insufficient measure of the entrepreneur's return. Explicit profit (C) is not a commonly used term to refer to the entrepreneur's return.

Question 19

Sheila's Sports Shop is a very popular sporting goods store, which has a yearly revenue of $600,000. Sheila runs the business herself. Her alternative employment options are to be a college swimming coach for $50,000 per year or a construction worker for $40,000 per year. Sheila spends $230,000 purchasing goods for resale to her customers. She also has four employees, who each earn $25,000 per year. Sheila owns the building that her Sports Shop is housed in and she could have rented it out for $20,000 per year. Sheila's costs for the resources that she supplies to the business equal
A) $70,000 per year.
B) $90,000 per year.
C) $0 per year.
D) $330,000 per year.

Accepted Answer

The answer of Sheila's Sports Shop is a very popular...

Question 20

Which of the following statements does NOT correctly characterize normal profit?
A) It is part of a firm's opportunity cost.
B) It is equal to a firm's total revenue minus its opportunity cost.
C) It is the average return for supplying entrepreneurial ability.
D) None of the above because all the statements correctly characterize normal profit.

Accepted Answer

Normal profit is the minimum level of profit necessary to keep a firm in business, and it is equal to a firm's total revenue minus its opportunity cost. It is not the same as economic profit, which is total revenue minus both explicit and implicit costs.

Quiz 10: Organizing Production

Suppose Pippi buys an oven for her pizza parlor for $100,000. Pippi's pizza tasted so pitiful she went out of business 12 months later. She was able to sell the pizza oven for $75,000. This decrease in the value of the oven is

Heidi quit her job as a chef making $40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in wages to the waitresses and hostess and $20,000 per year to buy food. What is Heidi's economic profit for the year?

Among the opportunity costs of a firm are all of the following EXCEPT

Lucinda starts a business consulting company. She makes all the business decisions and bears the risk of running the business. The typical payment for Lucinda's work is ________.

The return that an entrepreneur can expect to earn, on average, is called

Economic profit is

An economic profit for a self-employed entrepreneur is

Economic profit is the difference between total revenue and

A normal profit for a self-employed entrepreneur is I. an opportunity cost. II) part of the implicit rental rate of the funds invested in the business.

Flora's Flower Shop bought a new van for $23,000. Today, the market price of this van is $11,000. The economic depreciation of the van is ________.

A normal profit is

If economic profit is equal to zero, then

Joe quits his job as an insurance agent and opens his own sporting goods store. If his profits as measured by his accountant are greater than zero, then

Ed is a freelance writer who could work for a newspaper at $25,000 a year but instead works for himself for $41,000 a year. His only business expenses are $1,000 for writing materials and $12,000 for rent. Ed's normal profit is $1,000. Ed's economic profit from working as a freelance writer is

Sue owns a baking company. The company's total revenue for a month is $4000. The monthly costs of resources bought in the market and of resources owned by the firm are $2000 and monthly costs of resources supplied by the owner are $1000. Sue's economic profit for the month is equal to

The average return for supplying entrepreneurial ability is the entrepreneur's

Which of the following statements does NOT correctly characterize normal profit?