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Chapter 6 Answers

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chapter Six businesses and Their Costs

ANSWERS TO END-OF-CHAPTER QUESTIONS

6-1 Distinguish clearly between a plant, a firm, and an industry. Contrast a vertically integrated firm, a horizontally integrated firm, and a conglomerate. Cite an example of a horizontally integrated firm from which you have recently made a purchase. A plant is an operating unit where production takes place. This production can be manufacturing, farming, mining, retailing, wholesaling, warehousing—anything, in short, necessary for the production and distribution of goods and services. A firm is the business organization that owns one or more plants. A firm can be very large, such as General Motors, which owns many plants in many …show more content…

Economic profits are not costs of production since the entrepreneur does not require the gaining of an economic profit to keep the firm operating. In economics, costs are whatever is required to keep a firm operating.
6-5 Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. He estimates his entrepreneurial talents are worth $3,000 per year. Total annual revenue from pottery sales is $72,000. Calculate accounting profits and economic profits for Gomez’s pottery firm. Explicit costs: $37,000 (= $12,000 for the helper + $5,000 of rent + $20,000 of materials). Implicit costs: $22,000 (= $4,000 of forgone interest + $15,000 of forgone salary + $3,000 of entrepreneurship). Accounting profit = $35,000 (= $72,000 of revenue - $37,000 of explicit costs); Economic profit = $13,000 (= $72,000 - $37,000 of explicit costs - $22,000 of implicit costs).
6-6 Which of the following are short-run and which are long-run adjustments? (a) Wendy’s builds a new restaurant; (b) IBM hires 200 more software engineers; (c) A farmer increases the amount of fertilizer used on his corn crop; and (d) An Alcoa plant adds a third shift of

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