compared to accounting cost economic costs tend to be: a) lower especially for large firms organised as corporations b) lower especially for small firms organised as proprietorships c) higher especially for large firms organised as corporations d) higher especially for small firms organised as proprietorships
D?
i agree with D because opportunity costs of owners of proprietorships are high (they could be working somewhere else) vs stockholders of corporations who don’t have to give up working somewhere else.
I am also for D.
Is it C? This is not about shareholders who have a very minute stake in the firm, its about the firm as a whole, opportunity cost is definitely higher for larger firms because they take big projects.
D seems ok but on the other hand cost of equity is econimic cost for large corporations. IS does not reflect cost of equity?
So how would opportunity cost be greater for a big company that can backup borrowing with assets, than for a small proprietorship company, where creditors come after the cavity fillings in your mouth when you go bankrup?
I would go with C too…
The question is about a difference in accounting and economic costs, so the key is in the structure of economic costs (i.e. the legal form in this case is crucial). D
My point is that economic cost would be higher coz it is essentially the opportunity cost + accounting cost. Now consider a choice between the two scenarios: 1. make an airport or make a bridge 2. open a small shop in this land or rent it. Now of course in the first case, the opportunity cost is extremely high, which is most probably the case with large firms. What is the answer AudreyMwala?
D beacuse of the opportunity cost- owners capital and time is not included in accounting profits
Which study session is this question from?
It is study session 4. Stalla
It is D – the cost of equity for a smaller firm is typically higher. Since discount rates and opp costs are NOT in acctg treatment, it has to be that EC > AC