1 You run an internet startup company from your home You hav

1) You run an internet startup company from your home. You have solar panels installed in your home which generate electricity that you sell to the local electric company any time you use less electricity than you are generating with your panels to run your business. Which one of the items listed below would be factored into economic profit but would NOT be factored into accounting profit?

A. Rent you pay a landlord for a small office.

B. The time your friends spend testing your software apps just because they like you.

C. Consultant fees you’ve already paid IBM consultants and cannot get back.

D. Monthly fees you pay a computer company to host your site.

E. The solar electricity that you use to run the business.

2) Sally sells seashells by the sea shore. She has both variable and fixed costs. All her fixed costs are sunk. When is it definitely in the Sally’s best interest to shut down and go home in the short run?

A. When her total revenues are less than the cost of fixed factors of production.

B. When her total revenues are less than the total cost of production.

C. Never. Never give up! Never Surrender!

D. When her total revenues are less than the cost of variable factors of production.

E. None of the above is correct.

Solution

(1) (B)

Accounting profit or cost doesn\'t include voluntary work.

(2) (D)

She will shut down when Price < AVC, that is, Revenue < Total variable costs.