Question 1

A basketball manufacturer is considering a number of options for its new factory.Given the following costs and benefits of the four different factory configurations,what are the marginal costs and benefits of the Extra Large configuration relative to the Large configuration?
 ........................Total Cost......Total Benefit
Configuration A(Small)..................$45,000.........70,000
Configuration B(Medium)...............120,000.......170,000
Configuration C (Large)..............240,000.......300,000
Configuration D (Extra Large).........400,000.......420,000

Accepted Answer

The marginal cost of the Extra Large configuration relative to the Large configuration is $160,000 ($400,000 - $240,000), and the marginal benefit is $120,000 ($420,000 - $300,000).

Question 2

Of the following types of costs,which is most likely a fixed cost for a shoe manufacturer?

Accepted Answer

A lump-sum royalty payment is a fixed cost because it does not vary with the level of production or sales.

Question 3

A spirits manufacturer is considering two potential production investments: Option A costs an initial $2 billion and will involve variable costs (labor and material)of $5 per bottle of spirits.Option B costs an initial $4 billion and will involve variable costs (labor and material)of $3 per bottle of spirits.Assuming an annual capital charge equal to 10 percent of the initial costs,what is the average fixed cost at production level of 30,000,000 bottles per year for the Option A facility?

Accepted Answer

Annual fixed cost of Option A= $2 billion x 0.1 = $200 million
Total cost of producing 30,000,000 bottles of spirits annually using Option A= $200 million + (30,000,000 x $5) = $350 million
Average fixed cost at production level of 30,000,000 bottles per year for Option A= $200 million/30,000,000= $6.67

Therefore, the best choice is Option A, as it has a lower variable cost per bottle and a lower initial cost, resulting in a lower average fixed cost at a production level of 30,000,000 bottles per year.

Question 4

A retailer has to pay $9 per hour to hire 13 workers.If the retailer only needs to hire twelve workers,a wage rate of $7 per hour is sufficient.What is the marginal cost of the 13th worker?

Accepted Answer

The marginal cost of the 13th worker is the additional cost incurred by hiring one more worker. The cost for 12 workers at $7 per hour is $84 (12 workers * $7). The cost for 13 workers at $9 per hour is $117 (13 workers * $9). The marginal cost is $117 - $84 = $33.

Question 5

A spirits manufacturer is considering two potential production investments: Option A costs an initial $2 billion and will involve variable costs (labor and material)of $5 per bottle of spirits.Option B costs an initial $4 billion and will involve variable costs (labor and material)of $3 per bottle of spirits.Assuming an annual capital charge equal to 10 percent of the initial costs,what is the average fixed cost at production level of 20,000,000 bottles per year for the Option B facility?

Accepted Answer

First, we need to calculate the total annual cost (fixed + variable) for each option.

Option A: 
Variable cost per bottle = $5 
Number of bottles produced per year = 20,000,000 
Total variable cost = $5 x 20,000,000 = $100,000,000 
Annual capital charge = 10% x $2 billion = $200,000,000 
Total annual cost = $100,000,000 + $200,000,000 = $300,000,000

Option B: 
Variable cost per bottle = $3 
Number of bottles produced per year = 20,000,000 
Total variable cost = $3 x 20,000,000 = $60,000,000 
Annual capital charge = 10% x $4 billion = $400,000,000 
Total annual cost = $60,000,000 + $400,000,000 = $460,000,000

Now, we can calculate the fixed cost for Option B by subtracting the variable cost from the total annual cost:

Fixed cost = Total annual cost - Variable cost 
Fixed cost = $460,000,000 - ($3 x 20,000,000) 
Fixed cost = $460,000,000 - $60,000,000 
Fixed cost = $400,000,000

Finally, we can calculate the average fixed cost per bottle at the production level of 20,000,000 bottles per year:

Average fixed cost = Fixed cost / Number of bottles produced 
Average fixed cost = $400,000,000 / 20,000,000 
Average fixed cost = $20

Therefore, the answer is (C): $23.

Question 6

Which of the following is NOT true if a firm shuts down and produces zero output in the short run?

Accepted Answer

Fixed costs will never be less than zero, as they are a set cost that must be paid regardless of production levels. Therefore, D cannot be true.

Question 7

Which of the following would be considered an extent decision?

Accepted Answer

Extent decisions involve determining the level or amount of a particular activity, such as deciding how many workers to hire, rather than whether to undertake the activity at all.

Question 8

Which of the following statements is true:

Accepted Answer

Accounting costs only include explicit costs, while economic costs also include implicit costs such as the opportunity cost of utilizing capital. Therefore, economic costs are always larger than accounting costs, making option D the correct answer.

Question 9

A computer manufacturer shares its production capacity across two separate products,computers and printers.If the profitability of selling printers decreases,then the company will find that the

Accepted Answer

The answer of A computer manufacturer shares its production capacity...

Question 10

To maximize profits,you should produce at the point where

Accepted Answer

To maximize profits, a firm should produce where marginal benefits (or marginal revenue) equal marginal costs, as this is the point where any additional unit would not add to profit.

Question 11

Buyers consider Marlboro cigarettes and Budweiser beer to be complements.If Marlboro just increased its prices,what would you expect to occur in the Budweiser market?

Accepted Answer

Marlboro and Budweiser are considered complements, meaning they are typically consumed together. If the price of Marlboro cigarettes were to increase, consumers may choose to reduce their overall spending on cigarettes and alcohol, which could result in a decrease in demand for Budweiser. The decrease in demand would likely result in Budweiser reducing its price to try and maintain or increase its market share. Therefore, we can expect demand to fall and Budweiser to reduce its price.

Question 12

A basketball manufacturer is considering a number of options for its new factory.Given the following costs and benefits of the four different factory configurations,which Configuration should they select?
 ........................Total Cost......Total Benefit
Configuration A(Small)..................$45,000.........90,000
Configuration B(Medium)...............120,000.......180,000
Configuration C (Large)..............240,000.......290,000
Configuration D (Extra Large).........400,000.......420,000

Accepted Answer

The answer of A basketball manufacturer is considering a number...

Question 13

According to the law of demand,

Accepted Answer

The law of demand states that when the price of a good or service decreases, the quantity demanded increases. Conversely, when the price of a good or service increases, the quantity demanded decreases. This relationship between price and quantity demanded is inverse or negative.

Question 14

Christine has purchased five bananas and is considering the purchase of a sixth.It is likely she will purchase the sixth banana if

Accepted Answer

According to the law of diminishing marginal utility, as Christine consumes more bananas, the marginal benefit she gets from each banana will decrease. Hence, for her to purchase the sixth banana, the marginal benefit of consuming it must exceed its price. If the marginal benefit is lower than the price, then she will not purchase it as it will not be worth the additional expenditure. Therefore, option B is the correct choice.

Question 15

A basketball company is considering purchasing a new machine that doubles capacity from 100 to 200 balls per day.The machine will occupy 1,000 square feet of unused space on the factory floor.Which costs are irrelevant in this decision to purchase a machine?

Accepted Answer

The rental expense associated with the entire factory is not directly related to the decision to purchase the new machine, as the 1,000 square feet of unused space is already available. The decision only pertains to the cost and benefits of purchasing the machine itself.

Question 16

If Sam's,a local watering hole,increased the price of a pint of Guinness by 20%,it estimates the number of MBA students purchasing Guinness would decrease by 4%.Based on this data,

Accepted Answer

The demand is inelastic because the percentage decrease in quantity demanded (4%) is less than the percentage increase in price (20%). Therefore, total revenues would increase.

Question 17

As a shoe company produces more shoes the average total cost of each shoe produced decreases.This is because

Accepted Answer

This phenomenon is known as scale economies, which means that as the scale of production increases, the average total cost of production decreases due to factors such as specialization, bulk purchasing, and efficient use of resources.

Question 18

A manufacturer produces 1,000 basketballs each day,which it sells to customers for $30 each.All costs associated with production and sales total $10,000; however,if the manufacturer were to produce one additional basketball per day,total costs would increase to $10,100.From these amounts,we can tell that

Accepted Answer

The answer of A manufacturer produces 1,000 basketballs each day,which...

Question 19

As a manufacturer increases output,which of the following costs should decrease?

Accepted Answer

As output increases, average fixed cost decreases because the fixed costs are spread over a larger number of units.

Question 20

A computer manufacturer can produce 5 computers for $5,000 and 10 computers for $7,500.Based on this information,what is the marginal cost per computer of the 6^th through 10^th computers?

Accepted Answer

The marginal cost is the change in total cost divided by the change in quantity. In this case, the change in total cost is $7,500 - $5,000 = $2,500, and the change in quantity is 10 - 5 = 5. Therefore, the marginal cost is $2,500 / 5 = $500.

Quiz 1: Managerial Economics