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Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :
- a)the firm is incurring an economic loss.
- b)implicit costs are Rs. 25,000.
- c)the total economic costs are Rs. 1,00,000.
- d)the individual is earning an economic profit of Rs. 25,000.
Correct answer is option 'A'. Can you explain this answer?
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Suppose that a sole proprietorship is earning total revenues of Rs. 1,...
Explanation:
To understand why option 'A' is the correct answer, it is important to first define the different types of costs involved in this scenario.
Explicit costs: These are the actual out-of-pocket expenses incurred by the firm, such as wages paid to employees, rent, utilities, etc. In this case, the explicit costs are Rs. 75,000.
Implicit costs: These are the opportunity costs associated with using resources owned by the firm, such as the owner's time and effort. In this case, the implicit cost is the Rs. 30,000 that the owner could earn by working for another company.
Total economic costs: This includes both explicit and implicit costs. In this case, the total economic cost is Rs. 1,05,000 (Rs. 75,000 + Rs. 30,000).
Now, let's look at the options provided and why they are incorrect:
Option 'B': This statement is partially true, as the implicit cost is indeed Rs. 25,000 (Rs. 1,00,000 - Rs. 75,000). However, this does not give us a complete picture of the firm's profitability.
Option 'C': This statement is incorrect, as the total economic cost is actually Rs. 1,05,000 (explicit cost + implicit cost).
Option 'D': This statement is also incorrect. While the owner may be earning a profit of Rs. 25,000 on paper (total revenue - total explicit costs), this does not take into account the opportunity cost of the owner's time and effort.
Therefore, option 'A' is the correct answer. If the owner could earn Rs. 30,000 by working for another company, but chooses to run their own business instead, this means that they value the non-monetary benefits of owning a business more than the additional income they could earn by working elsewhere. However, from an economic standpoint, the firm is still incurring an economic loss of Rs. 5,000 (total revenue - total economic cost).
To understand why option 'A' is the correct answer, it is important to first define the different types of costs involved in this scenario.
Explicit costs: These are the actual out-of-pocket expenses incurred by the firm, such as wages paid to employees, rent, utilities, etc. In this case, the explicit costs are Rs. 75,000.
Implicit costs: These are the opportunity costs associated with using resources owned by the firm, such as the owner's time and effort. In this case, the implicit cost is the Rs. 30,000 that the owner could earn by working for another company.
Total economic costs: This includes both explicit and implicit costs. In this case, the total economic cost is Rs. 1,05,000 (Rs. 75,000 + Rs. 30,000).
Now, let's look at the options provided and why they are incorrect:
Option 'B': This statement is partially true, as the implicit cost is indeed Rs. 25,000 (Rs. 1,00,000 - Rs. 75,000). However, this does not give us a complete picture of the firm's profitability.
Option 'C': This statement is incorrect, as the total economic cost is actually Rs. 1,05,000 (explicit cost + implicit cost).
Option 'D': This statement is also incorrect. While the owner may be earning a profit of Rs. 25,000 on paper (total revenue - total explicit costs), this does not take into account the opportunity cost of the owner's time and effort.
Therefore, option 'A' is the correct answer. If the owner could earn Rs. 30,000 by working for another company, but chooses to run their own business instead, this means that they value the non-monetary benefits of owning a business more than the additional income they could earn by working elsewhere. However, from an economic standpoint, the firm is still incurring an economic loss of Rs. 5,000 (total revenue - total economic cost).
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Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer?
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Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer?.
Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer?.
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ample number of questions to practice Suppose that a sole proprietorship is earning total revenues of Rs. 1,00,000 and is incurring explicit costs of Rs. 75,000. If the owner could work for another company for Rs. 30,000 a year, we would conclude that :a)the firm is incurring an economic loss.b)implicit costs are Rs. 25,000.c)the total economic costs are Rs. 1,00,000.d)the individual is earning an economic profit of Rs. 25,000.Correct answer is option 'A'. Can you explain this answer? tests, examples and also practice CA Foundation tests.
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