Sample Quiz
Multiple Choice
1. According to Adam Smith, we get our dinner from the butcher and baker due to their
a. invisible hands.
b. benevolence.
c. humanity.
d. self interest.
e. knowledge of our necessities.
2. Which of the following is not a type of profit discussed by economists?
a. accounting
b. economic
c. excess
d. normal
e. explicit
3. Which of the following is the difference between accounting profit and economic profit?
a. accounting profit considers all costs
b. economic profit considers only implicit costs
c. normal profit
d. equal to excess profit
e. zero
4. If accounting profit is less than normal profit, then the firm is earning
a. a loss.
b. an economic profit.
c. an excess profit.
d. negative accounting profit
e. equal to opportunity cost.
5. Assume you own your own business and your explicit costs are $10,000/year. You could earn $11,000 in your next best alternative job. Your revenue is $12,000/year. What is your accounting profit?
a. 1000
b. 2000
c. 11000
d. 12000
e. 22000
6. Assume you own your own business and your explicit costs are $10,000/year. You could earn $11,000 in your next best alternative job. Your revenue is $12,000/year. What is your economic profit?
a. 1000
b. 2000
c. 11000
d. 12000
e. 22000
7. If firms in an industry earn less than a normal profit,
a. firms will exit.
b. the price of resources in the industry will fall.
c. the opportunity cost of resources in the industry will fall.
d. The price of the industry's product will eventually rise.
e. all of the above
8. In the long-run, firms will earn
a. zero accounting profit.
b. zero economic profit.
c. negative accounting profit.
d. positive economic profit.
e. positive normal profit
9. The rationing function of prices is to
a. distribute scarce goods to those who value them most highly.
b. direct resources away from "over crowded" markets.
c. direct resources towards markets that are under-served.
d. make markets more equitable.
e. keep consumers from buying too much.
10. Which of the following can be a barrier to entry?
a. copyright protection
b. patents
c. regulation
d. product compatibility
e. all of the above
Problems/Short Answer
1. Assume you own, manage and are the only employee for a t-shirt concession at a college sports arena. The financial information for the business is given below.
Retail price of shirt $15
Number of shirts sold per day 100
Cost of plain t-shirt $5 each
Cost of t-shirt design $5 each
Equipment rental fee (per day) $100
Stand rental fee (per day) $200
Answer the following, based on the information provided.
a. What is your accounting profit?
b. Your next best alternative job is to work as a manager for another local retail business. If your economic profit is zero, how much could you earn as a manager for another business?
c. Assume you enjoy owning and operating the t-shirt stand (you value it at $100 per day). If your total costs increased to $1600, and if you shut down total cost would be zero, should you continue selling t-shirts? Explain.
2. Assume you have a permanent patent on a new machine for making t-shirts. The revenue from the new machine has production costs of $300,000 and generates $500,000 in revenue. If the annual interest rate is 10%, what is the market value of the patent?