Question 1

Total revenue minus expenses paid equals:
A)economic profit.
B)cost-adjusted revenue.
C)accounting profit.
D)financial revenue.

Accepted Answer

Total revenue minus expenses paid equals accounting profit. Accounting profit is calculated by subtracting explicit costs (such as wages and rent) from total revenue. It does not take into account implicit costs (such as opportunity costs) and therefore may overestimate the profitability of a business.

Question 2

Max earns a yearly salary of $120,000 per year from his job and $1,000 per year in interest on his savings. After he quits his job to start a company, he uses all his savings to purchase manufacturing equipment for his company. Given the above information and the data summarizing his first year in business in the table, how much economic profit or loss does Max earn?
$Table\
\begin{array}{|l|l|}
\hline \text { Revenue } & \begin{array}{l}
\text { Bills paid for } \
\text { inputs }
\end{array} \
\hline \$ 300,000 & \$ 175,000 \
\hline
\end{array}$
A)$4,000
B)$5,000
C)$125,000
D)$126,000

Accepted Answer

Economic profit is total revenue minus total costs. Max's total revenue is $300,000, and his total costs are $175,000. Therefore, his economic profit is $300,000 - $175,000 = $125,000.

Question 3

Malia earns a yearly salary of $130,000 in her job and earns $1,000 per year in interest on her savings. After she quits her job to start a company, she uses all her savings to purchase manufacturing equipment for her company. Given the above information and the data summarizing her first year in business in the table, how much economic profit or loss does Malia earn?
$${ \text { Table } } \
\begin{array} { | l | l | } 
\hline \text { Total revenue } & \text { Bills paid } \
\hline \$ 350,000 & \$ 200,000 \
\hline
\end{array}$$
A)$19,000
B)$21,000
C)$219,000
D)$171,000

Accepted Answer

Malia's economic profit is calculated as her total revenue minus her total costs, including both explicit costs (bills paid) and implicit costs (the value of her time and the interest she could have earned on her savings). In this case, her total revenue is $350,000, her explicit costs are $200,000, and her implicit costs are $130,000 (her salary) + $1,000 (interest on savings) = $131,000. Therefore, her economic profit is $350,000 - $200,000 - $131,000 = $19,000.

Question 4

Juan earns a yearly salary of $120,000 in his job and $1,000 per year in interest on his savings. After he quits his job to start a company, he uses all his savings to purchase manufacturing equipment for his company. Given the above information and the data summarizing his first year in business in the table, how much accounting profit or loss does Juan earn?
$Table\
\begin{array}{|l|l|}
\hline \text { Revenue } & \begin{array}{l}
\text { Bills paid for } \
\text { inputs }
\end{array} \
\hline \$ 300,000 & \$ 175,000 \
\hline
\end{array}$
A)$4,000
B)$5,000
C)$125,000
D)$126,000

Accepted Answer

Accounting profit is calculated by subtracting total explicit costs from total revenue. In Juan's case, his revenue from the business is $300,000 and his explicit costs (bills paid for inputs) are $175,000. Therefore, his accounting profit is $300,000 - $175,000 = $125,000. The salary and interest are not considered in this calculation because they are not expenses incurred from the business operations.

Question 5

Junko earns a yearly salary of $130,000 in her job and $1,000 per year in interest on her savings. After she quits her job to start a company, she uses all her savings to purchase manufacturing equipment for her company. Given the above information and the data summarizing her first year in business in the table, how much accounting profit or loss does Junko earn?
$${ \text { Table } } \
\begin{array} { | l | l | } 
\hline \text { Total revenue } & \text { Bills paid } \
\hline \$ 350,000 & \$ 200,000 \
\hline
\end{array}$$
A)$19,000
B)$21,000
C)$150,000
D)$171,000

Accepted Answer

Junko's accounting profit is calculated as total revenue minus explicit costs (bills paid). So, $350,000 - $200,000 = $150,000.

Question 6

The formula for calculating accounting profit is total revenue minus _____ costs.
A)explicit financial
B)total
C)opportunity
D)explicit financial costs minus implicit opportunity

Accepted Answer

Accounting profit is calculated by subtracting explicit financial costs from total revenue. Explicit financial costs are those that involve actual monetary payments, such as salaries, rent, utilities, and taxes. Therefore, choice A is the best option as it specifically mentions explicit financial costs.

Question 7

Implicit opportunity costs of running a business include:
A)bills that a company pays.
B)debt that a company has accumulated during the year.
C)earnings that are given up in order for the owner to start or run a business.
D)the imagined costs of inputs that a company buys at a discount.

Accepted Answer

Implicit opportunity costs refer to the earnings that are given up in order for the owner to start or run a business. These costs are not easily visible or quantifiable, but they are an important consideration for any business owner. Choices A, B, and D refer to explicit costs such as bills, debt, and imagined costs, respectively.

Question 8

The two main types of implicit opportunity costs are:
A)bills paid and revenue forgone.
B)bills paid and forgone wages.
C)earned wages and earned interest.
D)forgone wages and forgone interest.

Accepted Answer

Implicit opportunity costs refer to opportunities that are forgone as a result of a decision. The two main types of implicit opportunity costs are forgone wages (the wages that could have been earned if an alternative employment opportunity was pursued) and forgone interest (the interest that could have been earned on a financial investment if the funds were not used for another purpose). Choices A and B include bills paid, which are not considered an implicit opportunity cost. Choice C includes earned wages and earned interest, which are not forgone opportunities and therefore not considered implicit opportunity costs.

Question 9

Corinne is offered a job with a salary of $70,000, which she turns down to start her own business. She uses $20,000 of her own savings to help start the business, savings that had been providing her a return of $1,000 per year. Over her first year in business, Corinne collects total revenue of $180,000 and must cover explicit costs of $105,000. During her first year in business, Corinne's accounting profit is _____, and her economic profit is _____.
A)$110,000; $4,000
B)$75,000; $4,000
C)$75,000; -$16,000
D)$110,000; -$16,000

Accepted Answer

Corinne's accounting profit is her total revenue minus her explicit costs, which is: 
$180,000 - $105,000 = $75,000

To calculate Corinne's economic profit, we need to take into account her implicit costs. We know that Corinne turned down a job with a salary of $70,000 to start her own business. This means that her implicit costs are $70,000, which is the salary she could have earned if she had taken the job offer. Additionally, she gave up $1,000 in interest earnings from her savings to invest in her business, which is another implicit cost.

Therefore, Corinne's economic profit is:
Accounting profit - implicit costs = $75,000 - $71,000 = $4,000

So, the best choice is B.

Question 10

How do a company's accounting profit and economic profit compare in size?
A)Accounting profit is larger than economic profit, if there are implicit costs.
B)Economic profit is larger than accounting profit, if there are implicit costs.
C)They are equal in size, regardless of whether there are implicit costs.
D)Economic profit is larger when the firm has losses, and accounting is larger when there are profits.

Accepted Answer

Accounting profit only takes into account explicit costs, while economic profit considers both explicit and implicit costs. If there are implicit costs, such as the opportunity cost of using resources in one way instead of another, economic profit will be lower than accounting profit. Therefore, accounting profit is usually larger than economic profit if there are implicit costs.

Question 11

Which of the following statements is true?
A)A firm with accounting profits will also have economic profits.
B)A firm with economic losses will also have accounting losses.
C)A firm with economic profits will also have accounting profits.
D)A firm with accounting losses can also have economic profits.

Accepted Answer

Economic profits take into account both explicit and implicit costs, including opportunity costs, whereas accounting profits consider only explicit costs. Therefore, if a firm has economic profits, it means it has covered both its explicit and implicit costs, implying it must also have accounting profits, which only cover explicit costs.

Question 12

Amal gives up a salary of $80,000 per year to start his company. He invests $50,000 of his savings in his company, savings that had been earning him $4,000 per year in interest. During Amal's first year in business, total revenue is $300,000, and his explicit financial costs are $225,000. What is Amal's economic profit from his first year in business?
A)-$59.000
B)-$9,000
C)$71,000
D)$75,000

Accepted Answer

Amal's economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Explicit costs are $225,000. Implicit costs include the forgone salary of $80,000 and the forgone interest of $4,000, totaling $84,000. Therefore, total costs (explicit + implicit) are $225,000 + $84,000 = $309,000. Subtracting this from the total revenue of $300,000 gives an economic profit of -$9,000.

Question 13

Luana gives up a salary of $80,000 per year to start her company. She invests $50,000 of her savings in her company, savings that had been earning her $4,000 per year in interest. During Luana's first year in business, total revenue is $300,000, and her explicit financial costs are $225,000. What is Luana's accounting profit from her first year in business?
A)-$59.000
B)-$9,000
C)$71,000
D)$75,000

Accepted Answer

Accounting profit is calculated as total revenue minus explicit costs. Luana's total revenue is $300,000, and her explicit financial costs are $225,000. Therefore, her accounting profit is $300,000 - $225,000 = $75,000.

Question 14

If a business owner is maximizing their economic profit, the owner:
A)might be suffering accounting losses.
B)cannot have any implicit opportunity costs.
C)is better off financially than with any other use of the resources used in the business.
D)has implicit opportunity costs that are larger than the direct financial costs.

Accepted Answer

Maximizing economic profit means that the business owner is earning the highest possible profit from their resources, taking into account all explicit and implicit costs. This means that the owner is better off financially than with any other use of the resources used in the business. It is possible that the owner is suffering accounting losses but is still maximizing their economic profit by earning enough revenue to cover both explicit and implicit costs. Implicit opportunity costs are already taken into account when calculating economic profit, so it cannot be larger than the direct financial costs.

Question 15

Because _____ profit is calculated based on _____ costs, it allows firm owners to make better decisions about _____.
A)economic; total; entering and exiting a market
B)accounting; total; increasing or decreasing output
C)economic; implicit opportunity; increasing or decreasing output
D)accounting; implicit opportunity; entering and exiting a market

Accepted Answer

Economic profit is calculated by considering both explicit and implicit costs, including opportunity costs, which helps firm owners make informed decisions about entering or exiting a market.

Question 16

John is thinking of opening a florist shop. He forecasts revenues of $200,000 per year and explicit financial costs of $140,000 per year. He can pursue this opportunity only if he quits his current job as a driver, where he earns $45,000 per year. He would also need to invest $110,000 of his savings to set up the shop-funds on which he would otherwise be earning a 6% return. Based on this information, how much economic profit or loss would John earn in his first year in business?
A)a loss of $50,000
B)a loss of $5,400
C)a profit of $8,400
D)a profit of $60,000

Accepted Answer

Economic profit = Revenues - Explicit costs - Implicit costs= $200,000 - $140,000 - ($45,000 + $110,000 * 0.06)= $200,000 - $140,000 - $51,000= $8,400

Question 17

Maia is thinking of opening a restaurant. She forecasts revenues of $200,000 per year and explicit financial costs of $140,000 per year. She can pursue this opportunity only if she quits her current job as a hair stylist, where she earns $45,000 per year. She would also need to invest $110,000 of her savings to set up the restaurant-funds on which she would otherwise be earning a 6% return. Based on this information, what are Maia's implicit opportunity costs?
A)$6,600
B)$51,600
C)$155,000
D)$161,600

Accepted Answer

Maia's implicit opportunity costs include the salary she foregoes by quitting her job ($45,000) and the interest she would have earned on her savings ($110,000 * 6% = $6,600), totaling $51,600.

Question 18

Neville is a lawyer at a large law firm where he earns a salary of $170,000 per year. He is thinking of leaving the firm to set up his own law office. To do this, he would need to invest $140,000 of his savings, which currently earns 5% in interest each year. He estimates that if he starts a law office, his annual revenue will be $510,000, and his explicit financial costs will be $300,000. How much would Neville earn in economic profits or losses if he starts his own law office?
A)-$100,000
B)$33,000
C)$203,000
D)$210,000

Accepted Answer

Neville's economic profit calculation includes his explicit costs, opportunity costs, and revenue. Explicit costs are $300,000. Opportunity costs include his current salary ($170,000) and the interest he would forgo on his savings ($140,000 * 5% = $7,000), totaling $177,000. His revenue from the law office would be $510,000. Subtracting both explicit and opportunity costs from his revenue ($510,000 - $300,000 - $177,000) gives an economic profit of $33,000.

Question 19

Portia is graduating from dental school and has a job offer with a salary of $140,000 from a chain of dental clinics. However, she wants to set up her own dental practice instead. To do this, she would need to invest her own funds in new equipment that would cost $80,000-funds that have been earning her a return of 10% per year. Portia estimates that her practice would have revenue of $470,000 per year and annual explicit financial costs of $330,000. What would Portia's economic profit or loss be if she sets up her own practice?
A)a loss of $80,000
B)a loss of $8,000
C)a profit of $132,000
D)a profit of $322,000

Accepted Answer

Portia's economic profit is calculated by subtracting both explicit and implicit costs from her revenue. Her explicit costs are $330,000. Her implicit costs include the foregone salary of $140,000 and the foregone return on her investment, which is $8,000 (10% of $80,000). Therefore, her total costs are $330,000 + $140,000 + $8,000 = $478,000. Her revenue is $470,000, leading to an economic loss of $8,000.

Question 20

How does a business owner know if it is financially worthwhile to open a business?
A)The implicit opportunity costs are less than revenue.
B)There are no implicit opportunity costs.
C)The business earns accounting profits.
D)The business earns economic profits.

Accepted Answer

A business owner should consider economic profits rather than accounting profits when determining if it is financially worthwhile to open a business. Economic profits take into account both explicit and implicit costs, including opportunity costs. If the economic profits are positive, it means that the business is generating enough revenue to cover all costs, including the opportunity cost of the resources used in the business, and is therefore financially worthwhile to open.

Quiz 15: Entry, Exit, and Long-Run Profitability

Total revenue minus expenses paid equals:

The formula for calculating accounting profit is total revenue minus _____ costs.

Implicit opportunity costs of running a business include:

The two main types of implicit opportunity costs are:

How do a company's accounting profit and economic profit compare in size?

Which of the following statements is true?

If a business owner is maximizing their economic profit, the owner:

Because ___ profit is calculated based on _ costs, it allows firm owners to make better decisions about ___.

How does a business owner know if it is financially worthwhile to open a business?