Question 1

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 $300 worth of lettuce.
-Refer to Scenario 13-6. Ziva's economic profit from farming equals
A)$-130.
B)$-80.
C)$130.
D)$170.

Accepted Answer

The answer of Scenario 13-6
Ziva is an organic lettuce farmer,...

Question 2

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.
-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

Accepted Answer

The answer of Scenario 13-8
Wanda owns a lemonade stand. She...

Question 3

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.
-Refer to Scenario 13-7. Julia's explicit costs are
A)0.
B)$10,000.
C)$15,000.
D)$25,000.

Accepted Answer

Julia's explicit costs include the expenses for her tax and bookkeeping business, which were $15,000. The foregone income from her previous job as an in-home pet sitter is not considered an explicit cost because she no longer incurs any expenses for that business.

Question 4

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.
-Refer to Scenario 13-7. Julia's economic profits are
A)$160,000.
B)$150,000.
C)$135,000.
D)$125,000.

Accepted Answer

The answer of Scenario 13-7
Julia prepares tax returns and does...

Question 5

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.
-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.

Accepted Answer

The answer of Scenario 13-6
Ziva is an organic lettuce farmer,...

Question 6

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.
-Refer to Scenario 13-7. Julia's implicit costs are
A)0.
B)$10,000.
C)$15,000.
D)$25,000.

Accepted Answer

Implicit costs are the opportunity costs of the resources already owned by the person. In this case, Julia's opportunity cost of giving up her pet sitting job is $10,000 per year. Therefore, her implicit cost is $10,000.

Question 7

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.
-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.

Accepted Answer

The answer of Scenario 13-6
Ziva is an organic lettuce farmer,...

Question 8

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.
-Refer to Scenario 13-8. What are Wanda's total economic profits?
A)$150
B)$126
C)$96
D)$54

Accepted Answer

The answer of Scenario 13-8
Wanda owns a lemonade stand. She...

Question 9

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%.
-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.

Accepted Answer

Emily's total opportunity cost of capital is the sum of the interest she could have earned on her savings account ($2,000) plus the interest she will pay on the bank loan ($12,000), for a total of $14,000. Therefore, she is giving up the opportunity to earn $14,000 by investing her money in the restaurant instead of leaving it in her savings account. Therefore, the best choice would be to consider if the potential profits from the restaurant outweigh the opportunity cost of losing the $14,000.

Question 10

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.
-Refer to Scenario 13-7. Julia's accounting profits are
A)$160,000.
B)$150,000.
C)$135,000.
D)$125,000.

Accepted Answer

To calculate accounting profits, we need to subtract all business expenses and opportunity costs from revenues. Accounting profits = Revenues - Expenses - Opportunity costs. 
In this scenario, Julia's revenues were $150,000 and her expenses were $15,000. Her opportunity cost was the $10,000 per year she used to earn from pet sitting. Therefore, her accounting profits would be: $150,000 - $15,000 - $10,000 = $135,000. Hence, the correct answer is (C).

Question 11

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%.
-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.

Accepted Answer

The answer of Scenario 13-4
Suppose that Abdul opens a coffee...

Question 12

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.
-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

Accepted Answer

Wanda's implicit cost is the opportunity cost of her labor, which is $0.10 per glass. Therefore, the answer is B.

The best choice for Wanda is to continue producing and selling lemonade as her total revenue would be $150 ($0.50 x 300 glasses) while her total cost would be $0.18 ($0.01+$0.02+$0.03+$0.02+$0.10) per glass. This would result in a profit of $132 ($150 - $18).

Question 13

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 $300 worth of lettuce.
-Refer to Scenario 13-6. Ziva's accounting profit from farming equals
A)$-80.
B)$130.
C)$170.
D)$260.

Accepted Answer

Ziva's accounting profit from farming is the revenue she expects to earn from selling her lettuce minus the cost of planting the seeds. Therefore, her accounting profit from farming is $300 - $130 = $170. As she also has demand for her home-organization services at a rate of $25 per hour, she could potentially earn more income by focusing on her consulting business rather than farming, depending on how many hours she can devote to each activity.

Question 14

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%.
-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.

Accepted Answer

Abdul's annual explicit cost of capital is the cost of the loan (which is at an interest rate of 8%). Therefore, his annual explicit cost of capital is 8% of $100,000, which is $8,000. The interest earned on his savings account is not relevant to calculating his explicit cost of capital.

Question 15

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%.
-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.

Accepted Answer

The answer of Scenario 13-5
Suppose that Emily opens a restaurant....

Question 16

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.
-Refer to Scenario 13-8. What are Wanda's total accounting profits?
A)$150
B)$126
C)$96
D)$24

Accepted Answer

Wanda's total revenue would be 300 x $0.50 = $150. Her total costs would be the sum of her costs per glass multiplied by the number of glasses produced: (0.01+0.02+0.03+0.02+0.10) x 300 = $36. Therefore, her total accounting profits would be $150 - $36 = $114. However, we need to add back in the opportunity cost of her labor, which was $0.10 per glass or $30 total. So her total accounting profits would be $114 + $30 = $144.

Question 17

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.
-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

Accepted Answer

The total opportunity cost of the day that Farmer Ziva spent in the field planting lettuce is the sum of what she could have earned from her home-organization services plus the potential profit she could have made from lettuce farming if she had focused solely on her consulting business. Farmer Ziva could have earned $250 from organizing homes (10 hours x $25/hr) instead of working on her farm. In addition, she could have potentially earned $300 from lettuce farming if she had used all her time and resources for that purpose. Therefore, the total opportunity cost for the day is $250 + $130 + $300 = $380. The best choice is D.

Question 18

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%.
-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.

Accepted Answer

Emily's explicit cost of capital is the sum of the interest payments on her loan and the opportunity cost of not earning interest on the money she used from her personal savings.

Interest payment on loan = $200,000 x 6% = $12,000
Opportunity cost of not earning interest on personal savings = $100,000 x 2% = $2,000

Total annual explicit cost of capital = $12,000 + $2,000 = $14,000

Therefore, the best choice is C, which is the total annual explicit cost of capital.

Question 19

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.
-Refer to Scenario 13-9. Ellie's annual implicit costs will equal
A)$55,200.
B)$75,200.
C)$80,500.
D)$165,700.

Accepted Answer

The answer of Scenario 13-9
Ellie has been working for an...

Question 20

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.
-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

Accepted Answer

Wanda's total economic costs per glass:
Water cost per glass = $0.01
Sugar cost per glass = $0.02
Lemon cost per glass = $0.03
Cups cost per glass = $0.02
Labor cost per glass = $0.10
Total economic cost per glass = $0.18

She sells each glass for $0.50. Thus, her profit per glass is:
Revenue per glass = $0.50
Economic cost per glass = $0.18
Profit per glass = $0.50 - $0.18 = $0.32
Therefore, the best choice for Wanda is to keep producing lemonade since she is making a profit of $0.32 per glass.

Quiz 13: The Costs of Production