MBA 701 - MIDTERM EXAM QUESTIONS AND ANSWERS
WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
c. Foregone interest of using money that could have been kept in a bank
Explicit costs denote input costs that require an outlay of money by the firm. Implicit costs, on the
other hand, refer to input costs that do not require an outlay of money by the firm, which are ignored
by accountants. An example of implicit costs is the forgone interest income not earned on financial
capital used by the firm (this financial capital can be lent out to other businesses (or kept in a bank)
and earn interest, if not used by this firm).
Which of the following is an implicit cost to a firm that produces a good or service?
a. Labor costs
b. Costs of operating production machinery
c. Foregone interest of using money that could have been kept in a bank
d. Costs of renting or buying land for a production site
,c. $5,000
Economic Profit = Total revenue - Total costs (including explicit and implicit costs). The implicit cost
here is the forgone best alternative, the $45,000 annual salary she turned down (not the vale of the 3
job offers combined, as she cannot take all of them together at the same time). So, economic profit =
50,000 (the accounting profit, which is revenue - explicit cost) - 45,000 (the implicit cost) = $5,000.
Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When
deciding to open her own business, she turned down three separate job offers with annual salaries of
$30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?
[Economic Profit = Total revenue - Total costs (including explicit and implicit costs)].
a. $-55,000
b. $-5,000
c. $5,000
d. $20,000
b. if managers put forth little effort, they receive little pay; if they put forth much effort and hence
generate many sales and more profit, they receive a lot of pay.
Incentives affect how resources are used and how hard workers work. To succeed as manager, you
must have a clear grasp of the role of incentives within an organization such as a firm and how to
, construct incentives to induce maximum effort form those you manage. A key in an incentive plan is to
design a mechanism that if managers does what is in their own interest, they will indirectly do what is
best for the owner of the firm.
Incentive plans imply ____.
a. if managers get highly paid, then they work hard.
b. if managers put forth little effort, they receive little pay; if they put forth much effort and hence
generate many sales and more profit, they receive a lot of pay.
c. managers are not selfish.
d. managers should be watched all the time.
a. 2,562
1,000/(1.10)^1 + 2,000/(1.10)^2 = $2,561.98.
If the interest rate is 10 percent and cash flows are $1,000 at the end of year one and $2,000 at the end
of year two, then the present value of these cash flows is ____.
[For a stream of future values: PV = FV1/(1+i)1 + FV2/(1+i)2 + … + FVn/(1+i)n].
a. $2,562
b. $3,200
c. $439
WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
c. Foregone interest of using money that could have been kept in a bank
Explicit costs denote input costs that require an outlay of money by the firm. Implicit costs, on the
other hand, refer to input costs that do not require an outlay of money by the firm, which are ignored
by accountants. An example of implicit costs is the forgone interest income not earned on financial
capital used by the firm (this financial capital can be lent out to other businesses (or kept in a bank)
and earn interest, if not used by this firm).
Which of the following is an implicit cost to a firm that produces a good or service?
a. Labor costs
b. Costs of operating production machinery
c. Foregone interest of using money that could have been kept in a bank
d. Costs of renting or buying land for a production site
,c. $5,000
Economic Profit = Total revenue - Total costs (including explicit and implicit costs). The implicit cost
here is the forgone best alternative, the $45,000 annual salary she turned down (not the vale of the 3
job offers combined, as she cannot take all of them together at the same time). So, economic profit =
50,000 (the accounting profit, which is revenue - explicit cost) - 45,000 (the implicit cost) = $5,000.
Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When
deciding to open her own business, she turned down three separate job offers with annual salaries of
$30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?
[Economic Profit = Total revenue - Total costs (including explicit and implicit costs)].
a. $-55,000
b. $-5,000
c. $5,000
d. $20,000
b. if managers put forth little effort, they receive little pay; if they put forth much effort and hence
generate many sales and more profit, they receive a lot of pay.
Incentives affect how resources are used and how hard workers work. To succeed as manager, you
must have a clear grasp of the role of incentives within an organization such as a firm and how to
, construct incentives to induce maximum effort form those you manage. A key in an incentive plan is to
design a mechanism that if managers does what is in their own interest, they will indirectly do what is
best for the owner of the firm.
Incentive plans imply ____.
a. if managers get highly paid, then they work hard.
b. if managers put forth little effort, they receive little pay; if they put forth much effort and hence
generate many sales and more profit, they receive a lot of pay.
c. managers are not selfish.
d. managers should be watched all the time.
a. 2,562
1,000/(1.10)^1 + 2,000/(1.10)^2 = $2,561.98.
If the interest rate is 10 percent and cash flows are $1,000 at the end of year one and $2,000 at the end
of year two, then the present value of these cash flows is ____.
[For a stream of future values: PV = FV1/(1+i)1 + FV2/(1+i)2 + … + FVn/(1+i)n].
a. $2,562
b. $3,200
c. $439
