Use the following cost information for the Creamy Crisp Donut Company to answer questions 16-23:
Entrepreneur’s potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Entrepreneur’s potential economic profit from the next best entrepreneurial activity = $80,000
Entrepreneur’s forgone interest on personal funds used to finance the business = $6,000
Reference: 20-16
Refer to the above data. Creamy Crisp’s accounting profit is:
A) $150,000.
B) $230,000.
C) $380,000.
D) $294,000.
The basic characteristic of the short run is that:
A) barriers to entry prevent new firms from entering the industry.
B) the firm does not have sufficient time to change the size of its plant.
C) the firm does not have sufficient time to cut its rate of output to zero.
D) a firm does not have sufficient time to change the amount
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Accounting!
1. B. $380,000 – 120,000 – 22,000 – 8,000 = 230,000.
Revenue minus costs = profit. The $50,000 is the opportunity cost of his starting his own business. It is how much he would earn if he didn’t open the business. $80,000 is another opportunity cost if he did another business instead. $6,000 is a personal cost for interest on a personal loan.
2. B.
A isn’t not indicative of short-run.
C can be done immediately.
D can be done immediately.
In B, you cannot immediately build a bigger plant or buy more land, thus it is a “fixed” cost. Now, at the end of the fiscal period, you can afford to buy a bigger plant, that’s is long run.
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1. B
2. B