18) John owns a shoe shine business.  His accountant most likely
includes which of the following costs in his financial statements?
a)wages John could earn washing windows
b)dividends John's money was earning in the stock market before John
sold his stock and bought a shoe shine booth.
c)the cost of shoe polish
d)all of the above are correct


19)The amount of money that a wheat farmer could have earned if he had
planted barley instead of wheat is:
a)an explicit cost
b)an accouting cost
c)an implicit cost
d)forgone accounting profit

21)Economic profit 
a)will never exceed accounting profit.
b)is most often equal to accounting profit.
c)is always at least as large as accounting profit.
d)is a less complete measure of profitibility than accounting profit.

22)When a firm is making a profit-maximizing production decision,
which of the following principles of economics is likely to be most
important to the firm's decision?
a)the cost of something is what you give up to get it
b)a country's standard of living depends on its ability to produce
goods and services
c)prices rise when the government prints too much money
d)governments can sometimes improve market outcomes

23)A firm's opportunity costs of production amount to its:
a)explicit costs only
b)implicit costs only
c)explicit costs + implicit costs
d)explicit costs + implicit costs + total revenue

25)Dolores used to work as a high school teacher for $40,000 per year
but quit in order to start her own catering business.  To buy
necessary equipment, she withdrew $20,000 from her savings, (which
paid 3% interest) and borrowed $30,000 from her uncle, whom she pays
3% interest per year.  Last year she paid $25,000 for ingredients and
had revenue of $60,000.  She asked Louis the accountant and Greg the
economist to calculate her profit for her.

a)Louis says her profit is $34,100 and Greg says her profit is $6,500
b)Louis says her profit is $34,100 and Greg says she lost $6,500
c)Louis says her profit is $35,000 and Greg says she lost $5,000
d)Louis says her profit is $33,500 and Greg says her profit is $33,500

Hi k9queen!
These are the answers:

18) C) the cost of shoe polish 

"accounting profit: The difference between a business's revenue and
it's accounting expenses..."

Accounting profit
http://www.amosweb.com/cgi-bin/gls.pl?fcd=dsp&key=accounting+profit

The accountant doesn't take in account the opportunity cost or other
incomes not related to the store

19) C) an implicit cost

"implicit cost: An opportunity cost that does NOT involve a money
payment or a market transaction. This should be contrasted with
explicit cost that DOES involve a money payment or a market
transaction..."

Implicit cost
http://www.amosweb.com/cgi-bin/gls.pl?fcd=dsp&key=implicit+cost

21) A) will never exceed accounting profit

"economic profit: The difference between business revenue and total
opportunity cost..."

Economic Profit
http://www.amosweb.com/cgi-bin/gls.pl?fcd=dsp&key=economic+profit

Since the business revenue (income-expense) is equal to the accounting
profit, we get that, since the opportunity cost is either positive or
zero, economic profit can't be greater than accounting profit

22) A) the cost of something is what you give up to get it

The firm must take into account that in order to produce their goods,
they must forego the opportunity of producing something else and
selling it. If another opportunity is likely to produce more profit,
that other opportunity should be pursued.

23) C) explicit costs + implicit costs 

From the definitions of implicit and explicit costs (given in the
links above) you can see that these two are part of the opportunity
cost.

25) B) Louis says her profit is $34,100 and Greg says she lost $6,500

The accounting profit is simply income minus expense, all related to
the business. Here, the revenue was $60,000, while the expenses were:

- $25,000 for the ingredients, and
- $900 for interests she has to pay to her uncle

leaving an accounting profit of $34,100. However, if she hadn't
started the business, she would have earned $40,000, plus $600 from
interests from her savings. Therefore, the economic profit is:

34100-40000-600 = -$6,500

Therefore, she lost $6,500.


More information on opportunity costs can be found at:

Opportunity Cost
http://www.investopedia.com/offsite.asp?URL=http://william-king.www.drexel.edu/top/prin/txt/Cost/cost3.html


Google search strategy
explicit cost
implicit cost
opportunity cost
economic profit
accounting profit


I hope this helps! If you have any doubts regarding my answer, please
request a clarification before rating it. Otherwise I await your
rating and final comments.

Best wishes!
elmarto

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Request for Answer Clarification by k9queen-ga on 16 Oct 2003 16:11 PDT

Hi Elmarto-ga,
Thanks for all the help, could you answer Micro. (11)? or any of the
others that are still open?
Thanks!
k9queen

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Clarification of Answer by elmarto-ga on 17 Oct 2003 06:14 PDT

Hi k9queen!
I'm glad you liked the answers. I don't have much time right now to
answer the other questions, but I'll do my best to answer them as soon
as possible.

Best wishes!
elmarto