Question

1)Accounting costs are always greater than economic costs.(T/F)

2)When businesses earn zero economic profit, they have no incentive to stay in business.(T/F)

3) If the price of a good increases, the substitution effect will:

		Always tend to make the quantity decrease, while the income effect could go either way
		Go either way, but the income effect will always make the quantity decrease
		Always tend to make the quantity increase, while the income effect could go either way
		Go either way, but the income effect will always make the quantity increase

Answer 1

1. - False

Economic Costs are always higher than accounting cost. Economic cost includes explicit cost as well as implicit cost whereas accounting cost includes only explicit cost.

2- False

When businesses earn zero economic profit, they have an incentive to stay in business because the firm's revenue also covers implicit cost incurred by the owners e.g. their time and money.

Ans.3- (A)

Substitution effect is always negative whereas income effect can be positive or negative depending on normal or inferior good.