question
Accounting profits
answer
profit as shown on a company's financial statements
question
Economic profit
answer
A measure of profit that includes recognition of implicit costs (like the cost of equity capital). Economic profit measures the true profitability of decisions.
question
Fixed-cost fallacy
answer
consideration of costs that do not vary with the consequences of your decision (also known as sunk-cost fallacy). In other words, you consider irrelevant costs. A common example of this is to let overhead or depreciation costs influence short-run decisions.
question
Hidden-cost fallacy
answer
occurs when you ignore irrelevant costs (costs that do vary with the consequence of your decision). A common example is to ignore the opportunity cost of capital when making investment or shutdown decisions.
question
Implicit costs
answer
additional costs that do not appear on the financial statements of a company. An example is the opportunity cost of capital.
question
Opportunity costs
answer
The profit you would have received had you chosen the next best option
question
Relevant benefits/costs
answer
all benefits/costs that vary with the consequence of a decision
question
A business owner makes 1000 items per day. Each day she contributes eight hours to produce those items. If hired, elsewhere she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the firm's accounting profit for the month equals:
a. $300,000
b. $60,000
c. $450,000
d. $240,000
a. $300,000
b. $60,000
c. $450,000
d. $240,000
answer
a. $300,000 [correct; Revenue equals 1000 items per day $15/item30days = $450,000. Explicit costs are given as $150,000. Therefore, accounting profit = $450,000-$150,000 = $300,000]
question
A business owner makes 1000 items per day. Each day she contributes eight hours to produce those items. If hired, elsewhere she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the firm's economic profit for the month equals:
a. $300,000
b. $60,000
c. $450,000
d. $240,000
a. $300,000
b. $60,000
c. $450,000
d. $240,000
answer
d. $240,000 [correct; When calculating economic profit, opportunity costs are considered. Total Revenue is $450,000 (1000 item/day$15/item30days), Explicit costs are given at $150,000 and the opportunity cost of labor is $60,000 ($250.hr8hrs/day30days). Therefore, economic profit is $450,000-$150,000-$60,000 = $240,000]
question
If a firm is earning negative economic profits, it implies:
a) that accounting profits are zero
b) that accounting profits are positive
c) that accounting profits are negative
d) more information is needed
a) that accounting profits are zero
b) that accounting profits are positive
c) that accounting profits are negative
d) more information is needed
answer
d. More information is needed to conclude about accounting profits [correct; it is impossible to determine the relationship between economic and accounting profit without information on the economic costs involved]
question
Opportunity costs arise due to
a) resource scarcity
b) interest rates
c) limited wants
d) unlimited scarcity
a) resource scarcity
b) interest rates
c) limited wants
d) unlimited scarcity
answer
a. Resource scarcity [correct; without scarce resources (time, labor, money, etc), the pursuit of another alternative does not require one to give up anything in return.
question
After graduating college, Jim had three choices (listed in order or preference):
1) move to Florida from Philly
2) work in a car dealership in Philly
3) play soccer for a minor league in Philly
What is his opportunity cost if he moves to Florida?
a. The benefits he could have received from playing soccer
b. The income he could have earned at the car dealership
c. Both a and b
d. Cannot be determined from the given information
1) move to Florida from Philly
2) work in a car dealership in Philly
3) play soccer for a minor league in Philly
What is his opportunity cost if he moves to Florida?
a. The benefits he could have received from playing soccer
b. The income he could have earned at the car dealership
c. Both a and b
d. Cannot be determined from the given information
answer
b. The income he could have earned at the car dealership [correct; opportunity cost reflects the value of the best foregone alternative, in this case the car dealership salary]
question
Economic Value Added (EVA) helps firms avoid the hidden cost fallacy by:
a) ignoring the opportunity costs of using capital
b) differentiating between sunk and fixed costs
c) taking all capital costs into account, including the cost of equity
d) none of the above
a) ignoring the opportunity costs of using capital
b) differentiating between sunk and fixed costs
c) taking all capital costs into account, including the cost of equity
d) none of the above
answer
c. by taking all capital costs into account including the cost of equity [correct; By taking all of the capital costs into account such as the cost of equity, firms can better gauge their economic profit and the opportunity costs associated with some of their current assets]
question
When does the fixed cost fallacy occur?
a. A firm considers irrelevant costs
b. A firm ignores relevant costs
c. A firm considers overhead or depreciation costs to make short-run decisions
d. Both a and c
a. A firm considers irrelevant costs
b. A firm ignores relevant costs
c. A firm considers overhead or depreciation costs to make short-run decisions
d. Both a and c
answer
d. Both a and c [correct; The sunk or fixed cost fallacy occurs when costs (such as depreciation and overhead) are considered even when they do not vary with the consequences of the decision.
question
Mr. D's BBQ of Pickwick produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab is then:
a. $7
b. $2
c. $5
d. impossible to determine
a. $7
b. $2
c. $5
d. impossible to determine
answer
a. $7. [correct; Total fixed costs are $5/lab ($50,000 Total Fixed Cost/10,000 units), and average variable cost is given as $2/slab. Therefore average total cost (Fixed + Variable) per unit equal $5+$2=$7]
question
All the following are examples of variable costs, except:
a. labor costs
b. cost of raw materials
c. accounting fees
d. electricity cost
a. labor costs
b. cost of raw materials
c. accounting fees
d. electricity cost
answer
c. Accounting fees [correct; accounting fees are paid regardless of total output. They do not vary with the amount that is produced]
question
The US government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000. The cost of using this land today exclusively for the reintroduction of the black-tailed prairie dog
a. is zero because they already own the land
b. is zero because the land represents sunk cost
c. is equal to the market value of the land
d. is equal to the total dollar value the land would yield if used for farming and ranching
e. depends on the value to society of black-tailed prairie dogs
a. is zero because they already own the land
b. is zero because the land represents sunk cost
c. is equal to the market value of the land
d. is equal to the total dollar value the land would yield if used for farming and ranching
e. depends on the value to society of black-tailed prairie dogs
answer
c. is equal to the market value of the land. [correct; the cost of a decision includes the cost of the best foregone option. In this case, this is the amount the government could sell the land for if they did not use if for prairie dog introduction]
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
