Question 1

The total cost (TC)of producing computer software diskettes (Q)is given as: TC = 200 + 5Q What is the average fixed cost?
A)500
B)5Q
C)5
D)5 + (200/Q)
E)none of the above

Accepted Answer

E

Question 2

Two small airlines provide shuttle service between Las Vegas and Reno.The services are alike in every respect except that Fly Right bought its airplane for $500,000,while Fly by Night rents its plane for $30,000 a year.If Fly Right were to go out of business,it would be able to rent its plane to another airline for $30,000.Which airline has the lower costs?
A)Fly Right.
B)Fly by Night.
C)Neither,the costs are identical.
D)Neither,Fly by Night has lower costs at small output levels and Fly Right has lower costs at high output levels.

Accepted Answer

Both airlines effectively have the same annual cost for their airplanes—Fly Right could earn $30,000 by renting out its plane, so its opportunity cost of using the plane is $30,000, the same as Fly by Night's rental cost.

Question 3

Constantine purchased 100 shares of IBM stock several years ago for $150 per share.The price of these shares has fallen to $55 per share.Constantine's investment strategy is "buy low,sell high." Therefore,he will not sell his IBM stock until the price rises above $150 per share.If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:
A)is correct and shows a solid command of the nature of opportunity cost.
B)is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.
C)is incorrect because when the price of a stock falls,the law of demand states that he should buy more shares.
D)is incorrect because it treats the price of the shares as an explicit cost.

Accepted Answer

The original price paid for the shares is a sunk cost and has no bearing on whether the shares should be held or sold. The investment decision should be based on the current market conditions and the potential future performance of the stock, not on the price paid in the past. Holding onto the shares until the price rises above $150 per share may not necessarily lead to the best return on investment in the long run.

Question 4

Which of the following statements is true regarding the differences between economic and accounting costs?
A)Accounting costs include all implicit and explicit costs.
B)Economic costs include implied costs only.
C)Accountants consider only implicit costs when calculating costs.
D)Accounting costs include only explicit costs.

Accepted Answer

Accounting costs include only explicit costs, which are the actual out-of-pocket expenses incurred in producing a good or service. Economic costs, on the other hand, include both explicit and implicit costs, such as the opportunity cost of using resources in a particular way instead of an alternative use.

Question 5

Consider the following statements when answering this question. I.Increases in the rate of income tax decrease the opportunity cost of attending college.
II.The introduction of distance learning,which enables students to watch lectures at home,decreases the opportunity cost of attending college.
A)I is true,and II is false.
B)I is false,and II is true.
C)I and II are both true.
D)I and II are both false.

Accepted Answer

The answer of Consider the following statements when answering this...

Question 6

Which of the following statements correctly uses the concept of opportunity cost in decision making? I."Because my secretary's time has already been paid for,my cost of taking on an additional project is lower than it otherwise would be."
II)"Since NASA is running under budget this year,the cost of another space shuttle launch is lower than it otherwise would be."
A)I is true,and II is false.
B)I is false,and II is true.
C)I and II are both true.
D)I and II are both false.

Accepted Answer

Opportunity cost refers to the cost of what is foregone to undertake a certain action. Both statements I and II incorrectly assess opportunity cost by suggesting that sunk costs (costs that have already been incurred and cannot be recovered) or current budget status affect the opportunity cost of additional projects or actions. The true opportunity cost would consider what alternative opportunities are foregone by taking on the additional project or space shuttle launch, not the costs already incurred or the current budget situation.

Question 7

The total cost (TC)of producing computer software diskettes (Q)is given as: TC = 200 + 5Q.What is the variable cost?
A)200
B)5Q
C)5
D)5 + (200/Q)
E)none of the above

Accepted Answer

Variable cost refers to the cost that varies with the level of output. In this equation, the only term that varies with the level of output (Q) is 5Q, therefore the variable cost is 5Q. The constant term 200 represents the fixed cost.

Question 8

Prospective sunk costs
A)are relevant to economic decision-making.
B)are considered as investment decisions.
C)rise as output rises.
D)do not occur when output equals zero.

Accepted Answer

Prospective sunk costs refer to future costs that have already been incurred or committed and cannot be recovered. These costs are relevant to economic decision-making because they can affect the decision to go forward with a project or investment. Therefore, A is the correct choice. B and C are not relevant to the concept of prospective sunk costs, and D is false because sunk costs can still occur even if output is zero.

Question 9

Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I."Even though I hate my MBA classes,I can't quit because I've spent so much money on tuition."
II)"To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product.When deciding whether to develop the new soap,we need to take this marketing cost into account."
A)I only
B)II only
C)Both I and II
D)Neither I nor II

Accepted Answer

Statement II demonstrates an understanding of sunk costs by recognizing the need to take into account the $10M marketing cost when making a decision about developing a new soap product. Statement I, on the other hand, demonstrates a misunderstanding of sunk costs by erroneously factoring in the money already spent on MBA tuition to the decision whether to continue taking classes. Sunk costs are irrelevant to decision making as they cannot be recovered regardless of the decision made.

Question 10

Incremental cost is the same concept as __________ cost.
A)average
B)marginal
C)fixed
D)variable

Accepted Answer

Incremental cost is the additional cost incurred by producing one more unit. This is the same concept as marginal cost, which is the cost of producing one additional unit. Average cost is the total cost divided by the quantity produced, fixed cost remains the same regardless of the quantity produced, and variable cost changes with the level of production but does not necessarily correspond to the cost of producing one more unit. Therefore, the best choice is B) marginal cost.

Question 11

The total cost (TC)of producing computer software diskettes (Q)is given as: TC = 200 + 5Q What is the fixed cost?
A)200
B)5Q
C)5
D)5 + (200/Q)
E)none of the above

Accepted Answer

The fixed cost is the constant term in the equation, which is 200.

Question 12

The total cost (TC)of producing computer software diskettes (Q)is given as: TC = 200 + 5Q What is the marginal cost?
A)200
B)5Q
C)5
D)5 + (200/Q)
E)none of the above

Accepted Answer

Marginal cost is the additional cost incurred by producing one more unit of software diskette. In this case, the TC equation shows that the cost increases by $5 for every additional diskette produced. Therefore, the marginal cost is simply $5.

Question 13

The total cost (TC)of producing computer software diskettes (Q)is given as: TC = 200 + 5Q What is the average total cost?
A)500
B)5Q
C)5
D)5 + (200/Q)
E)none of the above

Accepted Answer

The average total cost is given by dividing the total cost by the quantity produced, so:
ATC = TC/Q = (200 + 5Q)/Q = 200/Q + 5
Therefore, the average total cost is equal to 200 divided by the quantity produced, plus a constant term of 5. This matches option D: 5 + (200/Q).

Question 14

Which of the following costs always declines as output increases?
A)Average cost
B)Marginal cost
C)Fixed cost
D)Average fixed cost
E)Average variable cost

Accepted Answer

The answer of Which of the following costs always declines...

Question 15

In 1985,Alice paid $20,000 for an option to purchase ten acres of land.By paying the $20,000,she bought the right to buy the land for $100,000 in 1992.When she acquired the option in 1985,the land was worth $120,000.In 1992,it is worth $110,000.Should Alice exercise the option and pay $100,000 for the land?
A)Yes.
B)No.
C)It depends on what the rate of inflation was between 1985 and 1992.
D)It depends on what the rate of interest was.

Accepted Answer

Alice should exercise the option because the land's current value ($110,000) is higher than the price she would pay to exercise the option ($100,000), resulting in an immediate gain in value.

Question 16

Fixed costs are fixed with respect to changes in
A)output.
B)capital expenditure.
C)wages.
D)time.

Accepted Answer

Fixed costs do not change with changes in output, they remain constant. However, they can vary with changes in capital expenditure, wages, and time.

Question 17

The difference between the economic and accounting costs of a firm are
A)the accountant's fees.
B)the corporate taxes on profits .
C)the opportunity costs of the factors of production that the firm owns.
D)the sunk costs incurred by the firm.
E)the explicit costs of the firm.

Accepted Answer

Economic costs include both explicit costs (such as wages and rent) and implicit costs (such as opportunity costs of using resources for a particular activity). Accounting costs only include explicit costs. Therefore, the difference between economic and accounting costs is the opportunity cost of utilizing resources that the firm already owns or could be using elsewhere.

Question 18

Farmer Jones bought his farm for $75,000 in 1975.Today the farm is worth $500,000,and the interest rate is 10 percent.ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now.Farmer Jones could earn net profit of $15,000 (over and above all of his expenses)if he farms the land this year.What should he do?
A)Sell to ABC Corporation.
B)Farm the land for another year and sell to XYZ Corporation.
C)Accept either offer as they are equivalent.
D)Reject both offers.

Accepted Answer

The answer of Farmer Jones bought his farm for $75,000...

Question 19

In order for a taxicab to be operated in New York City,it must have a medallion on its hood.Medallions are expensive,but can be resold,and are therefore an example of
A)a fixed cost.
B)a variable cost.
C)an implicit cost.
D)an opportunity cost.
E)a sunk cost.

Accepted Answer

Medallions are a one-time expense that does not vary with the number of trips the taxicab makes, making it a fixed cost.

Question 20

Carolyn knows average total cost and average variable cost for a given level of output.Which of the following costs can she not determine given this information?
A)total cost
B)average fixed cost
C)fixed cost
D)variable cost
E)Carolyn can determine all of the above costs given the information provided.

Accepted Answer

The answer of Carolyn knows average total cost and average...

Quiz 7: The Cost of Production

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q What is the average fixed cost?

Which of the following statements is true regarding the differences between economic and accounting costs?

Consider the following statements when answering this question. I.Increases in the rate of income tax decrease the opportunity cost of attending college. II.The introduction of distance learning,which enables students to watch lectures at home,decreases the opportunity cost of attending college.

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q.What is the variable cost?

Prospective sunk costs

Incremental cost is the same concept as __________ cost.

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q What is the fixed cost?

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q What is the marginal cost?

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q What is the average total cost?

Which of the following costs always declines as output increases?

Fixed costs are fixed with respect to changes in

The difference between the economic and accounting costs of a firm are

In order for a taxicab to be operated in New York City,it must have a medallion on its hood.Medallions are expensive,but can be resold,and are therefore an example of

Carolyn knows average total cost and average variable cost for a given level of output.Which of the following costs can she not determine given this information?