Chapter 7 MCQ Flashcards
Appreciation is the decrease in value of equipment over time because of wear and tear and because it becomes obsolete. TF
False. Depreciation.
The opportunity cost of a self-employed worker’s time is zero. TF
False. Cost is value of best
If you borrow money from your parents for free, the opportunity cost of using that money to start a business is zero. TF
False. You could have invested the borrowed money in a bank and earned interest instead.
Returns from investing in stocks are guaranteed, while returns from saving money in the bank are risky. TF
False. The reverse is true.
Individuals who are risk averse need to be paid more to take a risk than risk-loving individuals would. TF
True. Need a higher risk premium.
The best alternative use of your money could be the interest earned if you put the borrowed money in a savings account. TF
True. Could be interest foregone or return on investing money elsewhere.
The time component of normal profits is the value of the best alternative use of the owner’s money. TF
False. Best alterative use of the owner’s time.
The money component of normal profits is the best alternative return on investment, including risk compensation. TF
True. Definition of normal profits
The interest rate is 10 percent per year. You invest $50 000 of your own money in a business and earn accounting profits of $20 000 after one year. If the opportunity cost of time is zero, economic profits are $30 000. TF
False. Economic Profits = Accounting Profits − Hidden Opportunity Costs = $20 000 − ($50 000 × 10%) = $15 000
It is a smart choice to remain in business if accounting profits are greater than zero. TF
False. Remain in business if accounting profits are greater than normal profits (or hidden opportunity costs). Suppose accounting profits are $15 000. If you could be earning $20 000 in a different job then owning the business is not the smart choice.
If revenues increase, business owners will be more likely to stay in the industry. TF
True. More revenues increase likelihood of normal or economic profits.
The difference between short-run and long-run equilibrium is the additional time it takes for supply changes to adjust normal profits to zero. TF
False. Time to adjust economic profits to zero. Only normal profits in long run.
Economic profits cause an increase in industry supply and a fall in price. TF
True. Economic profits are a green light for businesses to enter an industry.
Businesses are at the breakeven point when revenues equal hidden opportunity costs. TF
False. Businesses are at the breakeven point when revenues equal the total of all opportunity costs (including obvious costs and hidden opportunity costs).
Businesses will leave an industry when economic profits are zero. TF
False. Businesses making economic profits of zero will remain in the industry since they are earning normal profits — covering all opportunity costs of production.
What do accountants miss?
opportunity costs
obvious opportunity costs
hidden opportunity costs
everything
c) Accountants do not subtract implicit costs.
Success should be measured by
revenues.
costs.
accounting profits.
economic profits.
d) Revenues more than all opportunity costs.
Abdul operates his own business and pays himself a salary of $20 000 per year. He refused a job that pays $30 000 per year. What is the opportunity cost of Abdul’s time in the business?
$10 000
$20 000
$30 000
$50 000
c) Best he could earn working somewhere else.
if you borrow money from the bank to start a business, the interest you pay to the bank is
an obvious cost.
subtracted from revenues.
included in the calculation of accounting profits.
all of the above.
d) Interest paid is an obvious cost accountants subtract from revenues when calculating accounting profits.
An economist considers someone who is a gambler and does not need much compensation to go for an uncertain investment to be
crazy.
risk loving.
risk averse.
all of the above.
b) Gambler has a low risk premium.
Normal profits include
compensation for the use of a business owner’s time and money.
the sum of hidden opportunity costs.
what a business owner could have earned elsewhere.
all of the above.
d) By definition
Which of the following is not another way of saying “hidden opportunity costs”?
explicit costs
implicit costs
normal profits
the sum of the opportunity costs of time and money
a) Explicit costs are obvious, not hidden.
The key difference between economists and accountants is that economists
are always smarter.
are always better looking.
subtract hidden opportunity costs when calculating profits.
add opportunity costs when calculating profits.
c) Economic profits subtract hidden opportunity costs from accounting profits.
The definition of economic profits can also be written as
Economic Profits = Revenues - (Obvious Opportunity Costs + Normal Profits).
Economic Profits = Revenues - (Obvious Opportunity Costs + Hidden Opportunity Costs).
Economic Profits = Accounting Profits - Hidden Opportunity Costs.
All of the above.
d)
If your business earns accounting profits of $50 000 and economic profits of $20 000, what are your hidden opportunity costs?
$20 000
$30 000
$60 000
$70 000
b) Economic profits = Accounting Profits 2 Hidden Opportunity Costs.
If your business earns accounting profits of $50 000 and economic losses of $20 000, what are your hidden opportunity costs?
$20 000
$30 000
$60 000
$70 000
d) If hidden opportunity costs are greater than accounting profits, economics profits are negative (economic losses).
A business owner should enter an industry when
economic profits are positive.
additional benefits are greater than additional opportunity costs.
revenues are greater than all opportunity costs.
all of the above.
d) All definitions of positive economic profits.
Which of the following “signals the way” when making decisions to enter or exit an industry?
revenues
normal profits
economic profits
yield signs
c) Economic profit signals can be green (enter), yellow (no change), or red (exit).
When economic profits are zero, businesses are
breaking even.
not kicking themselves.
likely to remain in the industry.
all of the above.
d) Profits are the same as average profits in other industries.
When there are economic losses in an industry,
price falls.
supply decreases.
quantity supplied decreases.
demand decreases.
b) Businesses exit the industry, so the supply curve shifts leftward.
