Chapter 7 MCQ

Question 1

Appreciation is the decrease in value of equipment over time because of wear and tear and because it becomes obsolete. TF

Answer 1

False. Depreciation.

Question 2

The opportunity cost of a self-employed worker’s time is zero. TF

Answer 2

False. Cost is value of best

Question 3

If you borrow money from your parents for free, the opportunity cost of using that money to start a business is zero. TF

Answer 3

False. You could have invested the borrowed money in a bank and earned interest instead.

Question 4

Returns from investing in stocks are guaranteed, while returns from saving money in the bank are risky. TF

Answer 4

False. The reverse is true.

Question 5

Individuals who are risk averse need to be paid more to take a risk than risk-loving individuals would. TF

Answer 5

True. Need a higher risk premium.

Question 6

The best alternative use of your money could be the interest earned if you put the borrowed money in a savings account. TF

Answer 6

True. Could be interest foregone or return on investing money elsewhere.

Question 7

The time component of normal profits is the value of the best alternative use of the owner’s money. TF

Answer 7

False. Best alterative use of the owner’s time.

Question 8

The money component of normal profits is the best alternative return on investment, including risk compensation. TF

Answer 8

True. Definition of normal profits

Question 9

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

Answer 9

False. Economic Profits = Accounting Profits − Hidden Opportunity Costs = $20 000 − ($50 000 × 10%) = $15 000

Question 10

It is a smart choice to remain in business if accounting profits are greater than zero. TF

Answer 10

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.

Question 11

If revenues increase, business owners will be more likely to stay in the industry. TF

Answer 11

True. More revenues increase likelihood of normal or economic profits.

Question 12

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

Answer 12

False. Time to adjust economic profits to zero. Only normal profits in long run.

Question 13

Economic profits cause an increase in industry supply and a fall in price. TF

Answer 13

True. Economic profits are a green light for businesses to enter an industry.

Question 14

Businesses are at the breakeven point when revenues equal hidden opportunity costs. TF

Answer 14

False. Businesses are at the breakeven point when revenues equal the total of all opportunity costs (including obvious costs and hidden opportunity costs).

Question 15

Businesses will leave an industry when economic profits are zero. TF

Answer 15

False. Businesses making economic profits of zero will remain in the industry since they are earning normal profits — covering all opportunity costs of production.

Question 16

What do accountants miss?

opportunity costs
obvious opportunity costs
hidden opportunity costs
everything

Answer 16

c) Accountants do not subtract implicit costs.

Question 17

Success should be measured by

revenues.
costs.
accounting profits.
economic profits.

Answer 17

d) Revenues more than all opportunity costs.

Question 18

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

Answer 18

c) Best he could earn working somewhere else.

Question 19

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.

Answer 19

d) Interest paid is an obvious cost accountants subtract from revenues when calculating accounting profits.

Question 20

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.

Answer 20

b) Gambler has a low risk premium.

Question 21

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.

Answer 21

d) By definition

Question 22

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

Answer 22

a) Explicit costs are obvious, not hidden.

Question 23

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.

Answer 23

c) Economic profits subtract hidden opportunity costs from accounting profits.

Question 24

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.

Answer 24

d)

Question 25

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

Answer 25

b) Economic profits = Accounting Profits 2 Hidden Opportunity Costs.

Question 26

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

Answer 26

d) If hidden opportunity costs are greater than accounting profits, economics profits are negative (economic losses).

Question 27

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.

Answer 27

d) All definitions of positive economic profits.

Question 28

Which of the following “signals the way” when making decisions to enter or exit an industry?

revenues
normal profits
economic profits
yield signs

Answer 28

c) Economic profit signals can be green (enter), yellow (no change), or red (exit).

Question 29

When economic profits are zero, businesses are

breaking even.
not kicking themselves.
likely to remain in the industry.
all of the above.

Answer 29

d) Profits are the same as average profits in other industries.

Question 30

When there are economic losses in an industry,

price falls.
supply decreases.
quantity supplied decreases.
demand decreases.

Answer 30

b) Businesses exit the industry, so the supply curve shifts leftward.