Question

A business with $50,000 in assets is currently generating accounting costs of $2,000 and expects a normal rate of return of 10%. Which of the following must be true.

I. The firm has a total economic costs of more than $6500

II. If the firm has no other source of economic costs, then it should close the business if the total revenue is $8,000

III. If the total revenue is $5700, then the firm can be making an economic profit if the owner is doing some of the work herself.

a) None of them must be true

b) Only I must be true

c) Only II must be true

d) Only I and II must be true

e) All 3 must be true

Answer 1

Let us examine the given options

I. The firm has a total economic costs of more than $6500

Nothing is mentioned about costs other than $2000 of accounting cost. We cannot estimate the opportunity costs in absence of any other information. So, this option is false.  

II. If the firm has no other source of economic costs, then it should close the business if the total revenue is $8,000

Total Costs=2000+50000*10%=$7000

Profit=Total Revenue-Total Costs=8000-7000=$1000

Firm is making a positive profit. There is no need to close the business in absence of any other information. So, this option is false.

III. If the total revenue is $5700, then the firm can be making an economic profit if the owner is doing some of the work herself.

Total Costs=2000+50000*10%=$7000

Profit=Total Revenue-Total Costs=5700-7000=-$1300

Firm is making a loss. It is a false option.

So, correct choice is

a) None of them must be true