Question 1

Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business. Her annual opportunity cost of this new business is

Accepted Answer

Opportunity cost is the income given up by choosing one alternative over another. In this case, Sarah will be giving up her job which pays her $40,000 per year. Additionally, her savings of $50,000 which currently earns her an annual 10% rate of return will also be invested in the business. Therefore, her total opportunity cost will be:
$40,000 (income from job) + $5,000 (income from savings, 10% of $50,000) = $45,000. 
Hence, the best choice is option C. Opportunity cost formula = income earned in job - income earned in next best alternative
Sarah's income earned in her job = $40,000 per year
Income earned in her next best alternative (starting her own business) = expected return on investment + salary she pays herself

Expected return = 10% of $50,000 = $5,000
Salary she pays herself is not given, so we have to make an assumption. Let's assume she pays herself a salary of $40,000 per year, which is the same as her current job.

Therefore, income earned in her next best alternative = $5,000 (return on investment) + $40,000 (salary) = $45,000

Opportunity cost = $40,000 (income in current job) - $45,000 (income in next best alternative) = -$5,000

Since the opportunity cost is negative, it means Sarah would be better off starting her own business. This is because her income in the next best alternative (starting her own business) is actually greater than her income in her current job. So, the answer is C, $45,000.

Question 2

The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is

Accepted Answer

A

Question 3

One problem with measuring a durable good's cost is

Accepted Answer

B

Question 4

Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month and brought in revenues of $14,500. What are Manisha's economic profits?

Accepted Answer

Economic profit is calculated as total revenue minus total costs, including opportunity costs. Manisha's total revenue is $14,500. Her explicit costs are $6,000 (cheese) + $1,000 (other items) + $2,500 (rent) + $2,000 (salary) = $11,500. Her opportunity cost is the $10,000 she could have earned working elsewhere. Total costs are $11,500 + $10,000 = $21,500. Economic profit is $14,500 - $21,500 = -$7,000.

Question 5

A sunk cost is

Accepted Answer

A sunk cost is a past cost that cannot be recovered, regardless of the decision made. It is not relevant for decision-making because it has already been incurred and cannot be changed. Therefore, it should not be considered when making future business decisions.

Question 6

Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month and brought in revenues of $14,500. According to her accountant, what are Manisha's profits?

Accepted Answer

Manisha's profits are calculated as total revenues minus total expenses. Her total expenses include $6,000 on cheese, $1,000 on other items, $2,500 on rent, and $2,000 as her salary, totaling $11,500. Her revenues are $14,500. Therefore, her profits are $14,500 - $11,500 = $3,000.

Question 7

Sue is taking an accounting job she was offered that pays $67,000 per year. She also had two other offers, a sales job paying $71,000 per year and a marketing job paying $65,000 per year. What is Sue's opportunity cost of taking the accounting job?

Accepted Answer

The opportunity cost of taking the accounting job is the difference between the highest paying job (sales job at $71,000) and the job Sue actually took (accounting job at $67,000). Therefore, the opportunity cost is $71,000 - $67,000 = $4,000. However, since the question asks for the opportunity cost of taking the accounting job, we need to flip the sign, making the answer -$4,000. The other job offer (marketing job paying $65,000) is not relevant to the opportunity cost calculation as it pays less than the accounting job. Therefore, the best choice is C.

Question 8

One problem with measuring a durable good's cost is

Accepted Answer

Durable goods have a significant initial purchase cost that needs to be allocated over the useful life of the good, making it challenging to measure their cost accurately.

Question 9

An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

Accepted Answer

Opportunity cost refers to the value of the next best alternative foregone. In this case, it is the money you could have made working overtime, as that is the next best use of your time.

Question 10

A durable good is product that

Accepted Answer

A durable good is a good that is usable over a long period of time. This could include things like appliances, furniture, or vehicles that are meant to last for years, as opposed to disposable goods like paper towels or plastic utensils that are designed to be used once and then thrown away.

Question 11

You purchase a pizza oven that is expected to last 10 years for $15,000. How do you account for the economic cost of the oven?

Accepted Answer

The answer of You purchase a pizza oven that is...

Question 12

If a firm buys a building so as to have office space for its workers, the monthly opportunity cost of the building is best measured as

Accepted Answer

The monthly opportunity cost of the building is the rent the firm could earn if it rented the building to another firm since owning the building means the firm is giving up the opportunity to earn income by renting it out. The monthly mortgage payment or the price paid divided by twelve only reflect the cost of acquiring the building, not the opportunity cost of owning it. Choice C is incorrect as owning the building still involves an opportunity cost. The monthly opportunity cost of the building is the rent the firm could earn if it rented the building to another firm. This is because by choosing to use the building for its own purposes, the firm is foregoing the opportunity to earn rental income from it. Therefore, the opportunity cost is equal to the forgone rental income. Options A and B are not correct because they only measure the cost of owning the building, not the opportunity cost. Option C is not correct because there is still an opportunity cost even if the firm owns the building outright.

Question 13

If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the opportunity cost of using the van is

Accepted Answer

The answer of If a firm buys a delivery van...

Question 14

Tom is going to quit his job to pursue his PhD in economics, which will take him 6 years to complete. He currently makes $55,000 per year as a high school teacher. While going to school, he will receive a stipend of $24,000 per year plus $6,000 per year to help cover food and rent. His living expenses are the same regardless of what he does. What is Tom's opportunity cost of pursuing his PhD?

Accepted Answer

Tom's opportunity cost is the salary he foregoes by not working as a teacher, which is $55,000 per year for 6 years, totaling $330,000. The stipend and additional $6,000 do not affect the opportunity cost calculation.

Question 15

Which of the following is most likely to have increasing opportunity costs?

Accepted Answer

An office building in Tokyo is most likely to have increasing opportunity costs because as the demand for office space in a densely populated and economically vibrant city like Tokyo increases, the opportunity cost of using the building for any single purpose also increases. This is due to the high value and competitive demand for space in prime locations, making alternative uses of the building potentially very lucrative.

Question 16

An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

Accepted Answer

The opportunity cost cannot be determined with the information given as there is no indication of what you would have done if you had not gone out to dinner with your friend.

Question 17

Which of the following is NOT an explicit cost?

Accepted Answer

Explicit costs are direct payments made to others in the course of running a business or undertaking a project, such as wages, rent, and materials. The $100 in interest lost by using CD funds is an example of an implicit cost, which represents the opportunity cost of using resources owned by the business for something other than their intended purpose.

Question 18

Why might a police officer NOT pull over someone speeding two miles over the speed limit?

Accepted Answer

The opportunity costs of stopping the driver are considered too high because the officer might miss more serious crimes or incidents while dealing with a minor speeding violation. This is a consideration of what else could be done with the time and resources.

Question 19

Which of the following is most likely to have declining opportunity costs?

Accepted Answer

A delivery van is a man-made object that can be replicated easily, making it unlikely to have increasing opportunity costs. As technologies advance, it becomes cheaper and easier to produce vehicles, resulting in declining opportunity costs. On the other hand, the other options are physical locations that are limited in availability, making them more likely to have increasing opportunity costs as demand for them increases.

Question 20

Economic costs of an input include

Accepted Answer

Economic costs include both implicit and explicit costs. Implicit costs refer to the opportunity costs of using resources that have alternative uses, while explicit costs refer to the direct monetary expenses incurred for inputs such as labor, capital, and materials. Both types of costs must be considered when calculating the total economic cost of production. The answer D is incorrect because management's reporting may not necessarily reflect the true economic costs of production. Economic costs of an input include both implicit and explicit costs. Implicit costs refer to the opportunity costs of using resources owned by the firm while explicit costs are the actual monetary payments made for resources. Both of these costs must be considered when calculating the total economic cost of an input. Option A and B are not correct as they only consider one type of cost, while option D is not correct as it suggests that management can report whatever they wish, which is not a valid way to calculate economic costs.

Quiz 6: Costs

Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is

The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is

One problem with measuring a durable good's cost is

A sunk cost is

Sue is taking an accounting job she was offered that pays $67,000 per year. She also had two other offers, a sales job paying $71,000 per year and a marketing job paying $65,000 per year. What is Sue's opportunity cost of taking the accounting job?

One problem with measuring a durable good's cost is

An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

A durable good is product that

You purchase a pizza oven that is expected to last 10 years for $15,000. How do you account for the economic cost of the oven?

If a firm buys a building so as to have office space for its workers, the monthly opportunity cost of the building is best measured as

If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the opportunity cost of using the van is

Which of the following is most likely to have increasing opportunity costs?

An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

Which of the following is NOT an explicit cost?

Why might a police officer NOT pull over someone speeding two miles over the speed limit?

Which of the following is most likely to have declining opportunity costs?

Economic costs of an input include