Question 1

Which of the following is an implicit cost to a firm that produces a good or service?
A)labor costs.
B)costs of operating production machinery.
C)foregone profits of producing a different good or service.
D)costs of renting or buying land for a production site.

Accepted Answer

Implicit costs are the opportunity costs of using a resource in a particular way. In the case of a firm, the foregone profits that could have been earned by using the same resources to produce a different good or service are implicit costs. A, B, and D are examples of explicit costs as they involve actual monetary payments made by the firm.

Question 2

The primary inducement for new firms to enter an industry is:
A)increased technology.
B)availability of labor.
C)low capital costs.
D)presence of economic profits.

Accepted Answer

The presence of economic profits is the primary inducement for new firms to enter an industry. Economic profits are the profits earned over and above the opportunity cost of resources used in production, indicating that the market is not perfectly competitive and there is potential for new firms to earn profits. This attracts new entrants to the industry, increasing competition and driving down prices and profits for existing firms.

Question 3

As more firms enter an industry
A)accounting profits increase.
B)economic profits decrease.
C)prices rise.
D)none of the statements associated with this question are correct.

Accepted Answer

When more firms enter an industry, competition increases, leading to a decrease in economic profits as firms now compete for a smaller market share. Prices may also decrease as firms offer lower prices to attract customers. However, there is no guarantee that accounting profits will increase or decrease.

Question 4

If you put $1,000 in a savings account at an interest rate of 10%, how much money will you have in one year?
A)$1,200.
B)$909.
C)$950.
D)$1,100.

Accepted Answer

The interest earned in one year at 10% on $1,000 is $100 (10% of $1,000), so the total amount after one year is $1,000 + $100 = $1,100.

Question 5

To maximize profits, a firm should continue to increase production of a good until:
A)total revenue equals total cost.
B)profits are zero.
C)marginal revenue equals marginal cost.
D)average cost equals average revenue.

Accepted Answer

Marginal revenue represents the additional revenue earned by producing one more unit of output. Marginal cost represents the additional cost incurred by producing one more unit of output. At the point where marginal revenue equals marginal cost, the firm is producing at the level where the next unit of production would result in more cost than revenue. Hence, the firm should not produce any more goods beyond this level as it would lead to a decrease in profits. Therefore, the optimal production level to maximize profits is the point where marginal revenue equals marginal cost.

Question 6

If the interest rate is 5%, what is the present value of ten dollars received one year from now?
A)$9.50.
B)$10.05.
C)$9.52.
D)$9.77.

Accepted Answer

The formula for present value is: PV = FV / (1 + r)^n
where:
FV = future value
r = interest rate
n = number of periods

Plugging in the given values, we get:
PV = 10 / (1 + 0.05)^1
PV = 9.52

Therefore, the present value of ten dollars received one year from now at an interest rate of 5% is $9.52. The best choice is option C.

Question 7

A farm must decide whether or not to purchase a new tractor.The tractor will reduce costs by $2,000 in the first year, $2,500 in the second and $3,000 in the third and final year of usefulness.The tractor costs $9,000 today, while the above cost savings will be realized at the end of each year.If the interest rate is seven percent, what is the net present value of purchasing the tractor?
A)$6,764.
B)$9,362.
C)$18,362.
D)none of the statements associated with this question are correct.

Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to their present value and subtracting the initial investment. The NPV calculation is as follows: NPV = -$9,000 + ($2,000 / (1+0.07)^1) + ($2,500 / (1+0.07)^2) + ($3,000 / (1+0.07)^3). Calculating this gives an NPV of approximately -$1,130, which is not listed among the options.

Question 8

If the interest rate is five percent, the present value of $200 received at the end of five years is:
A)$121.34.
B)$156.71.
C)$176.41.
D)$132.62.

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($200), r is the interest rate (0.05), and n is the number of years (5). Plugging in the values, PV = 200 / (1.05)^5 = $156.71.

Question 9

Which of the following signals to the owners of scarce resources are the best uses of those resources?
A)profits of businesses.
B)government regulations.
C)economic indicators.
D)the accounting cost of those resources.

Accepted Answer

Profits of businesses signal to owners of scarce resources that their resources are being allocated efficiently and effectively in the marketplace. This is because profits indicate that there is demand for the goods or services being produced and that consumers are willing to pay for those goods or services at a price that covers the cost of production and generates a profit for the business. In turn, owners of scarce resources can invest more in the businesses that are generating profits and withdraw resources from those that are not. This process ensures that resources are allocated towards the production of goods and services that are valued by consumers and that generate economic growth.

Question 10

Suppose the interest rate is five percent, the expected growth rate of the firm is two percent, and the firm is expected to continue forever.If current profits are $1,000, what is the value of the firm?
A)$31,000.
B)$30,000.
C)$26,500.
D)$35,000.

Accepted Answer

The answer of Suppose the interest rate is five percent,...

Question 11

Which of the following is an implicit cost of going to college?
A)tuition.
B)cost of books and supplies.
C)room and board.
D)foregone wages.

Accepted Answer

Foregone wages refer to the income that a person could have earned if they were not in school. This is an opportunity cost that is often overlooked when considering the cost of education. Therefore, D is the correct answer as it describes an implicit cost of going to college. A, B, and C are all explicit costs as they involve direct expenses that must be paid for attending college.

Question 12

The opportunity cost of receiving ten dollars in the future as opposed to getting that ten dollars today is:
A)the foregone interest that could be earned if you had the money today.
B)the taxes paid on any earnings.
C)the value of $10 relative to the total income of that person.
D)the value of $10 relative to the total income of all persons.

Accepted Answer

The opportunity cost of receiving ten dollars in the future is the foregone interest that could be earned if we had that money today. This is because we could invest that money and earn interest on it, which we would miss out on if we waited to receive the ten dollars in the future.

Question 13

Accounting profits are:
A)total revenue minus total cost.
B)total cost minus total revenue.
C)marginal revenue minus total cost.
D)total revenue minus marginal cost.

Accepted Answer

Accounting profits are calculated by subtracting total cost from total revenue. This represents the amount of profit that a business has made after all expenses have been taken into account. It does not take into consideration the opportunity cost or the cost of investments, which are factors that are considered in calculating economic profit. Therefore, A is the best answer.

Question 14

The higher the interest rate:
A)the greater the present value of a future amount.
B)the smaller the present value of a future amount.
C)the greater the level of inflation.
D)none of the statements associated with this question are correct.

Accepted Answer

The present value of a future amount decreases as the interest rate increases because the future amount is discounted more heavily.

Question 15

Scarce resources are ultimately allocated toward the production of goods most wanted by society because:
A)firms attempt to maximize profits.
B)they are most efficiently utilized in these areas.
C)consumers demand inexpensive goods and services.
D)managers are benevolent.

Accepted Answer

Scarce resources are allocated towards the production of goods most wanted by society because firms attempt to maximize profits. This is the most important factor in determining how resources are allocated in a market economy. Profit-maximizing firms will produce those goods and services that are most in demand by consumers and that can be produced most efficiently. This ensures that scarce resources are used in the most efficient way possible, meeting the demands of society while generating maximum profits for the firms that produce them.

Question 16

If the interest rate is 10% and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is
A)$2,562.
B)$3,200.
C)$439.
D)$3,000.

Accepted Answer

The present value is calculated by discounting each cash flow back to the present using the formula PV = CF / (1 + r)^n. For year one: $1,000 / (1 + 0.10)^1 = $909.09. For year two: $2,000 / (1 + 0.10)^2 = $1,652.89. Adding these gives $2,561.98, which rounds to $2,562.

Question 17

When dealing with present value, a higher interest rate:
A)does not effect the present value of the future amount.
B)increases the present value of a future amount.
C)decreases the present value of a future amount.
D)none of the statements associated with this question are correct.

Accepted Answer

The higher the interest rate, the more valuable the money is in the present compared to the future, so the present value of a future amount decreases.

Question 18

A firm will have constant profits of $100,000 per year for the next four years and the interest rate is six percent.Assuming these profits are realized at the end of each year, what is the present value these future profits?
A)$325,816.
B)$376,741.
C)$400,000.
D)$346,511.

Accepted Answer

The answer of A firm will have constant profits of...

Question 19

Economic profits are:
A)total revenue minus total cost.
B)marginal revenue minus marginal cost.
C)total revenue minus total opportunity cost.
D)total profits of the economy as a whole.

Accepted Answer

Economic profits are calculated by subtracting the total opportunity cost (including both explicit and implicit costs) from total revenue, not just the accounting costs.

Question 20

A firm will maximize the present value of future profits by maximizing current profits when the:
A)growth rate in profits is constant.
B)growth rate in profits is larger than the interest rate.
C)interest rate is larger than the growth rate in profits and both are constant.
D)growth rate and interest rate are constant and equal.

Accepted Answer

When the interest rate is larger than the growth rate in profits and both are constant, maximizing current profits also maximizes the present value of future profits. This is because the discount factor applied to future profits (due to the interest rate being higher) makes them less valuable compared to immediate profits.

Quiz 1: The Fundamentals of Managerial Economics

Which of the following is an implicit cost to a firm that produces a good or service?

The primary inducement for new firms to enter an industry is:

As more firms enter an industry

If you put $1,000 in a savings account at an interest rate of 10%, how much money will you have in one year?

To maximize profits, a firm should continue to increase production of a good until:

If the interest rate is 5%, what is the present value of ten dollars received one year from now?

If the interest rate is five percent, the present value of $200 received at the end of five years is:

Which of the following signals to the owners of scarce resources are the best uses of those resources?

Suppose the interest rate is five percent, the expected growth rate of the firm is two percent, and the firm is expected to continue forever.If current profits are $1,000, what is the value of the firm?

Which of the following is an implicit cost of going to college?

The opportunity cost of receiving ten dollars in the future as opposed to getting that ten dollars today is:

Accounting profits are:

The higher the interest rate:

Scarce resources are ultimately allocated toward the production of goods most wanted by society because:

If the interest rate is 10% and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, then the present value of these cash flows is

When dealing with present value, a higher interest rate:

A firm will have constant profits of $100,000 per year for the next four years and the interest rate is six percent.Assuming these profits are realized at the end of each year, what is the present value these future profits?

Economic profits are:

A firm will maximize the present value of future profits by maximizing current profits when the: