Question 1

What is the difference between brand proliferation and product differentiation?

Accepted Answer

The answer of What is the difference between brand proliferation...

Question 2

Gennaro is a blogger living in Italy who could work for la Repubblica (a newspaper in Rome) as a food critic for $50,000 a year but instead runs the blogging business online through advertising, making revenues of $80,000 a year. His only business expenses are $2,000 for supplies and $18,000 in rent for his office space. What is Gennaro's economic profit from working as a freelance writer?

Accepted Answer

The answer of Gennaro is a blogger living in Italy...

Question 3

Costs that do not require a monetary outlay but instead reflect the dollar value of benefits forgone are:

Accepted Answer

Implicit opportunity costs refer to the benefits forgone from the next best alternative when making a decision. These costs do not require a monetary outlay and are therefore not included in accounting profits. Economic profits take into account both implicit and explicit costs, while outlay costs refer to actual monetary expenses. Therefore, the best choice is C, implicit opportunity costs.

Question 4

Generally, if you were to hire an accountant to assist you in an economic decision you were considering, the accountant would use only _____ costs in her analysis.

Accepted Answer

An accountant would use explicit financial costs in her analysis, which are the actual costs that involve an outlay of money. Implicit opportunity costs (A) refer to the value of the next best alternative foregone, while economic costs (B) take into account both explicit and implicit costs. Variable costs (D) are a type of cost that varies with changes in the level of production or output.

Question 5

When a firm makes a capital acquisition, the implicit cost of capital is:

Accepted Answer

The implicit cost of capital is the opportunity cost of using the firm's own funds to make a capital acquisition instead of investing them in alternative investments. It represents the rate of return that the firm could have earned on its investment if it had chosen to invest in a different opportunity of equal risk instead. Compared to the explicit cost of capital, the implicit cost is not shown on any accounting records and remains an invisible opportunity cost that presents a real financial liability to the firm. Therefore, it is essential to include the implicit cost of capital in determining economic profit, which accounts for both explicit and implicit costs. The expenses of leasing or buying machines, on the other hand, are explicit costs, which are easily measurable and recorded on financial statements.

Question 6

In southern California, the demand for real estate has been increasing rapidly for years. Therefore, the _____ cost of capital is _____ in southern California's vineyards.

Accepted Answer

The increasing demand for real estate in southern California indicates that the implicit opportunity cost of capital is increasing, meaning investors could potentially earn more money by investing in other real estate opportunities. This is opposed to explicit financial costs, such as interest rates or fees, which are not necessarily impacted by the demand for real estate in a specific area.

Question 7

Armand's accountant tells him that he made a profit of $21,300 running a pottery studio in Boston. Armand's wife, an economist, claims Armand lost $21,300 running his pottery studio. This means his wife is claiming that he incurred _____ in _____ costs.

Accepted Answer

The difference in profit calculation likely stems from the inclusion of implicit opportunity costs by Armand's wife, which are not considered in the accountant's calculation. If the accountant shows a profit of $21,300 and the wife claims a loss of the same amount, it suggests that the implicit opportunity costs (the income Armand could have earned elsewhere) are equal to the studio's accounting profit, doubling the total cost considered by the wife to $42,600.

Question 8

If Giordano's pizza in Chicago computed its profits without taking into account its implicit opportunity costs, it would then only be considering its _____ profit.

Accepted Answer

Implicit opportunity costs are the costs associated with foregone alternatives, such as the potential profits that Giordano's could have earned if it used its resources to pursue a different opportunity. Accounting costs, on the other hand, include only the explicit costs of producing a good or service, such as the cost of materials and labor. By ignoring implicit opportunity costs, Giordano's would only be considering its accounting profit.

Question 9

The implicit opportunity cost of capital is:

Accepted Answer

The implicit opportunity cost of capital refers to the opportunity cost of the capital used by a business. It is the return a firm could have earned if they had invested the capital in another project with similar risk.

Question 10

The costs used to calculate economic profit are:

Accepted Answer

Economic profit includes the accounting costs and implicit opportunity costs. Accounting costs are the actual expenses incurred in producing a good or service, while implicit costs are the opportunity costs of using resources for a particular purpose instead of the best alternative use. Therefore, economic profit includes both explicit and implicit costs.

Question 11

Gino's Pizzeria bought a new delivery van last year for $10,000. It can now sell the van for $8,500. To buy this year's model of the same van, Gino would have to pay $11,000. What is the implicit opportunity cost of capital (assuming there is no interest to pay)?

Accepted Answer

The implicit opportunity cost of capital is the amount of money Gino is giving up by keeping the old van instead of selling it and buying the new one. Since Gino can sell the old van for $8,500 and would have to pay $11,000 for the new one, the implicit opportunity cost of capital is $2,500 ($11,000 - $8,500). Therefore, the best choice is option D.

Question 12

Waterworks Irrigation was a startup that was open for only one year of operation. During that year, it collected $175,000 in revenue and spent $50,000 on trucks, irrigation supplies, employees, and utilities. The owner of the firm, Cosmo, spent $100,000 of his own money to buy an office building and set up the office (instead of buying bonds and earning a 10% annual rate of return), which he later sold at the end of the year for $100,000. The firm's economic profit is:

Accepted Answer

To calculate economic profit, we need to take into account the opportunity cost of using Cosmo's own money to set up the office rather than investing it in bonds and earning a 10% annual rate of return. 
Revenue - (Expenses + Opportunity Cost) = Economic Profit 
$175,000 - ($50,000 + $10,000) = $115,000 
Therefore, the economic profit of Waterworks Irrigation is $115,000.

Question 13

(Scenario: Accounting and Economic Profit) Use Scenario: Accounting and Economic Profit.
Scenario: Accounting and Economic Profit
Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. Her accounting profit is:

Accepted Answer

Casey's accounting profit can be calculated by subtracting her expenses from her revenue:

Revenue: $150,000 
Expenses: 
- Rent: $20,000 
- Equipment, furniture, and coffee machines: $60,000 
- Staff, sales help, and advertising: $40,000 
Total expenses: $120,000 
Accounting Profit: Revenue - Expenses = $150,000 - $120,000 = $30,000

Although Casey's café is earning a profit, it's important to note that she's not earning as much as she would if she had invested her inheritance in a mutual fund instead. Economic profit takes into consideration not just the explicit costs (like rent and equipment), but also the opportunity cost of the owner's time and the implicit costs of forgoing the next best alternative. In Casey's case, her economic profit would be negative because she's earning less than she would if she had stayed at her job as a translator and invested her inheritance in a mutual fund.

Question 14

(Scenario: Accounting and Economic Profit ) Use Scenario: Accounting and Economic Profit.
Scenario: Accounting and Economic Profit
Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. The implicit opportunity cost of capital of Casey's Coffee Crush is:

Accepted Answer

The implicit opportunity cost of capital is the return Casey foregoes by not investing the $100,000 in a mutual fund, which would have earned her 5% per year, equating to $5,000.

Question 15

(Scenario: Accounting and Economic Profit) Use Scenario: Accounting and Economic Profit.
Scenario: Accounting and Economic Profit
Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. What is the implicit opportunity cost of Casey's Coffee Crush?

Accepted Answer

The implicit opportunity cost of Casey's Coffee Crush is the income she gave up by quitting her job at the United Nations, which was $60,000 per year. Therefore, her total economic cost for the first year is:

$60,000 (opportunity cost of quitting her job) + $20,000 (rent) + $60,000 (equipment and furniture) + $40,000 (staff and advertising) = $180,000

Her revenue for the year was $150,000, so her accounting profit would be:

$150,000 (revenue) - $180,000 (total economic cost) = -$30,000

This means that Casey actually lost money in her first year of business. However, it is important to note that economic profit takes implicit opportunity costs into account, while accounting profit does not. In this case, the implicit opportunity cost was $60,000, which means that Casey's economic profit was:

$150,000 (revenue) - $180,000 (total economic cost) + $60,000 (implicit opportunity cost) = -$30,000 + $60,000 = $30,000

Therefore, while Casey had a negative accounting profit, her economic profit was actually positive. The implicit opportunity cost of her business was $65,000 ($60,000 opportunity cost + $5,000 difference between accounting and economic profit).

Question 16

(Scenario: Accounting and Economic Profit) Use Scenario: Accounting and Economic Profit.
Scenario: Accounting and Economic Profit
Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. The economic profit of Casey's Coffee Crush is:

Accepted Answer

The economic profit is calculated by deducting all the explicit and implicit costs from the revenue. In this scenario, Casey's revenue was $150,000, but she had to incur explicit costs such as rent ($20,000), equipment ($60,000), and staff and advertising costs ($40,000) which totaled $120,000. Therefore, her accounting profit would be $30,000 ($150,000 - $120,000). However, in order to calculate the economic profit, we need to include the implicit cost of her opportunity cost, which is the salary she gave up by quitting her job at the United Nations. Her opportunity cost would be $60,000, as that is the amount she would have earned if she had continued her job as a translator. Therefore, her economic profit would be -$30,000 ($30,000 - $60,000), which means that she actually incurred a loss by starting the café. Thus, the correct option is D, "-$35,000."

Question 17

Emilia is a civil rights lawyer with her own firm. She travels the country and provides legal advice to high-profile clients. Last year, she earned $250,000 in revenue for her services. She pays one employee $50,000 to manage her office in Chicago and pays $30,000 for rent and utilities for that office. Her accountant tells her that if she sold all her office equipment, she could put that money in the bank and earn $3,000 in interest next year. Emilia also has received an offer to teach law at the University of Chicago at a salary of $100,000. Emilia's accounting profit is _____, and her economic profit is _____.

Accepted Answer

To calculate Emilia's accounting profit, we add up all of her revenues and subtract all of her explicit costs:
Accounting profit = Total revenue - Explicit costs

Accounting profit = $250,000 - $50,000 - $30,000 = $170,000

To calculate Emilia's economic profit, we need to factor in her implicit costs. Implicit costs are the opportunity costs of using her resources in her current business instead of in the next best alternative. In this case, her next best alternative is teaching law at the University of Chicago for $100,000 per year.

Economic profit = Total revenue - Explicit costs - Implicit costs

Implicit costs = $100,000 (salary as a law professor) + $3,000 (interest forgone on the sale of office equipment) = $103,000

Economic profit = $250,000 - $50,000 - $30,000 - $103,000 = $67,000

Therefore, Emilia's accounting profit is $170,000 and her economic profit is $67,000.

Selling her office equipment would increase her accounting profit by $3,000, but it would not affect her economic profit because that money could be earning interest if she invested it elsewhere. Taking the job as a law professor would decrease her accounting profit by $100,000, but it would also decrease her implicit costs by the same amount, resulting in no change to her economic profit. Based on this analysis, Emilia should take the job as a law professor if she wants to maximize her economic profit.

Question 18

Suppose the New York Rangers can rent out Madison Square Garden (the arena where they play hockey) to American Hockey League (AHL) affiliates for $11,000 per game. The $11,000 per game is the _____ cost of capital.

Accepted Answer

The $11,000 per game represents the implicit opportunity cost of capital because it is the foregone income the New York Rangers could have earned by renting out Madison Square Garden to AHL affiliates instead of using it themselves.

Question 19

David's financial planner tells him that he made a profit of $31,300 running a ballroom dance studio in Sacramento. David's wife, an actuary, claims David lost $31,300 running his ballroom dance studio. This means his wife is claiming that he incurred _____ in _____ costs.

Accepted Answer

The difference in profit calculation likely stems from considering implicit opportunity costs, which are not directly recorded in financial transactions. David's wife, being an actuary, might be accounting for the opportunity cost of not investing the time and resources elsewhere, which could have generated $31,300. Therefore, if David's financial planner claims a profit of $31,300 without considering these costs, and his wife claims a loss of the same amount by including them, the total difference attributed to implicit opportunity costs would be $62,600.

Question 20

Suppose your local Lowe's home improvement store has explicit financial costs of $3 million per year and implicit opportunity costs of $74,000 per year. If the store earned an economic profit of $22,000 last year, the store's accounting profit was:

Accepted Answer

The answer of Suppose your local Lowe's home improvement store...

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

What is the difference between brand proliferation and product differentiation?

Costs that do not require a monetary outlay but instead reflect the dollar value of benefits forgone are:

Generally, if you were to hire an accountant to assist you in an economic decision you were considering, the accountant would use only _____ costs in her analysis.

When a firm makes a capital acquisition, the implicit cost of capital is:

In southern California, the demand for real estate has been increasing rapidly for years. Therefore, the _ cost of capital is _ in southern California's vineyards.

Armand's accountant tells him that he made a profit of $21,300 running a pottery studio in Boston. Armand's wife, an economist, claims Armand lost $21,300 running his pottery studio. This means his wife is claiming that he incurred _ in _ costs.

If Giordano's pizza in Chicago computed its profits without taking into account its implicit opportunity costs, it would then only be considering its _____ profit.

The implicit opportunity cost of capital is:

The costs used to calculate economic profit are:

Gino's Pizzeria bought a new delivery van last year for $10,000. It can now sell the van for $8,500. To buy this year's model of the same van, Gino would have to pay $11,000. What is the implicit opportunity cost of capital (assuming there is no interest to pay) ?

Suppose the New York Rangers can rent out Madison Square Garden (the arena where they play hockey) to American Hockey League (AHL) affiliates for $11,000 per game. The $11,000 per game is the _____ cost of capital.

David's financial planner tells him that he made a profit of $31,300 running a ballroom dance studio in Sacramento. David's wife, an actuary, claims David lost $31,300 running his ballroom dance studio. This means his wife is claiming that he incurred _ in _ costs.

Suppose your local Lowe's home improvement store has explicit financial costs of $3 million per year and implicit opportunity costs of $74,000 per year. If the store earned an economic profit of $22,000 last year, the store's accounting profit was: