Multiple choice economics?

Question

12) In the presence of sunken capital costs, the relationship between short-run and long-run economic and accounting profit is best described by?

a) SR economic profit = accounting profit. LR economic profit < accounting profit.

b) SR economic profit > accounting profit. LR economic profit < accounting profit.

c) SR accounting profit <economic profit. LR accounting profit = economic profit.

d) SR economic profit > accounting profit. LR economic profit > accounting profit.

13) A firm installed a factory costing £100m. Of this, half the cost is land, the other half is capital, which is renewed when the factory is rebuilt every 10 years. The interest rate and depreciation costs are £20 m per annum. The intended output was worth £50m per annum, employing £20m of labour. In fact, sales and labour input are half the planned level. Does the firm

a)Stay open?

b)Shut immediately?

c)Shut eventually rather than rebuild?

Both answers are c. Why?

Answer 1

12. c) SR accounting profit &lt;economic profit. LR accounting profit = economic profit. because accounting profit is net of depreciation in SR and in the longrun accounting profit as well as the economic profit are net of entire capital costs. Accounting profit deducts part of capital costs over each successive shortrun while economic profit charges the entire capital costs at one go in the longrun life of capital costs.

13. c)Shut eventually rather than rebuild because the project in unviable: the actual annual revenues are $25 million which is less than the total annual costs of $30 million ( $20 million in interest and depreciation plus labor costs of $10 million

Answer 2

12 - because short-run doesn&#039;t include depreciation but long-run does.

13 - because currently factory covers only variable costs but not total costs.