Question 1

The divergence between money costs and opportunity costs will be greatest in which of the following situations?
A) A university purchases 100 computers.
B) A university employs people from town in the cafeteria (the other alternative is to work at a paper mill).
C) A university employs otherwise unemployed teenagers to paint crosswalks and curbs.
D) A university replaces the roof of the fine arts building.

Accepted Answer

In situation C, the opportunity cost of hiring otherwise unemployed teenagers to paint crosswalks and curbs is low because they may not have other job opportunities. However, the money cost of paying them for their work may be relatively high. This creates a large divergence between money costs and opportunity costs. In the other situations, the opportunity cost is more closely aligned with the money cost, resulting in a smaller divergence.

Question 2

Rational production decisions require an understanding of
A) trade-offs.
B) opportunity costs.
C) scarcity of resources.
D) All of the responses are correct.

Accepted Answer

Rational production decisions require an understanding of trade-offs, which are the alternatives that must be given up when making a choice; opportunity costs, which represent the value of the next best alternative; and scarcity of resources, which means that there are limited resources available to produce goods and services. Therefore, all of the responses are correct.

Question 3

Which of the following is an example of opportunity cost not measured by money cost?
A) The time spent eating a business lunch at a restaurant
B) The time spent preparing a meal eaten at home
C) The time spent studying to obtain an "A" in economics
D) The time spent repairing a car in one's own garage
E) All of the responses are correct.

Accepted Answer

All of the options listed involve an opportunity cost that is not measured by money cost. The time spent on each activity could be spent on alternative activities, such as working or spending time with family and friends. Therefore, the opportunity cost of each activity is the alternative activity that is forgone.

Question 4

A ticket to an Eric Clapton concert costs $45. If you have a ticket, you can "scalp" it (sell it illegally) for $75. To a ticket holder, the opportunity cost of actually attending the concert is
A) $45.
B) $50.
C) $75.
D) $115.

Accepted Answer

The opportunity cost of attending the concert is the value of the next best alternative foregone, which in this case is the $75 that could have been earned by scalping the ticket.

Question 5

Which of these options best reflects Jim's opportunity cost of operating his own business?
A) The total amount of money he spends to obtain capital equipment
B) The value of Jim's managerial skills that are used to run the business
C) The cost of hiring his laborers
D) All of the responses are correct.

Accepted Answer

Opportunity cost refers to the value of the alternative foregone. In this case, Jim's opportunity cost is the value of the next best alternative use of his managerial skills. Option B reflects this as it identifies Jim's managerial skills as the opportunity cost of running his own business. The other options may be costs incurred in running the business but do not reflect the opportunity cost.

Question 6

As a strategy to boost enrollment, in January 1996, a private college in Iowa offered free tuition for graduating high school seniors from the county where it is located. For students who accepted the offer, how did this offer affect the opportunity cost of attending college?
A) The opportunity cost did not change, since lost earnings were still a factor.
B) The opportunity cost became zero for the typical student.
C) The opportunity cost was very low, because the only cost was for books and supplies.
D) The opportunity cost did not change, since tuition was not a factor in computing opportunity cost.
E) The opportunity cost was lower than if tuition was charged, but there was still a cost.

Accepted Answer

The opportunity cost for attending college is the value of the next best alternative forgone, which in this case would be the earnings from working or attending a different college. While tuition may not be a factor for some colleges, it is still relevant to opportunity cost. Therefore, even though the tuition was free, there may still be costs for books, supplies, and other expenses that would lower the opportunity cost but not make it zero.

Question 7

The money cost of a particular good will approximate its opportunity cost if
A) there are serious distortions in the market.
B) the market functions well.
C) there is much specialization in the market.
D) nations are exploiting the law of comparative advantage.

Accepted Answer

If the market functions well, the price of a good will accurately reflect its opportunity cost, which is the value of the next best alternative that must be given up to produce or consume the good. This is because in a well-functioning market, prices are determined through the interaction of supply and demand and producers and consumers are acting rationally to maximize their own well-being. In such a market, there are no serious distortions that would cause the price to deviate significantly from the true opportunity cost.

Question 8

In a market economy, the decision regarding allocation of resources is made by
A) the operation of the forces of supply and demand.
B) policy authorities in Washington, D.C.
C) budget planners in state capitals.
D) committees from a variety of economic interest groups.
E) All of the responses are correct.

Accepted Answer

In a market economy, the forces of supply and demand determine the allocation of resources. The prices set by suppliers and the willingness of consumers to pay those prices determine how resources are allocated. The government may play a role in regulating the market economy, but ultimately it is the market itself that makes decisions regarding resource allocation.

Question 9

The opportunity cost and the money cost of a good
A) can be the same in a well-functioning free market.
B) are never the same.
C) matter only to the purchaser of the good.
D) are not reflected in its price.

Accepted Answer

In a well-functioning free market, the price of a good reflects both its opportunity cost and money cost. The opportunity cost is the value of the next best alternative that must be given up in order to acquire the good, while the money cost is the price that must be paid to acquire it. The market price of the good reflects both of these costs, and in a competitive market, it will tend towards the level where the opportunity cost and money cost are equal. Therefore, in a well-functioning free market, the opportunity cost and money cost of a good can be the same.

Question 10

The divergence between money costs and opportunity costs is the smallest in which of the following situations?
A) China hires millions of otherwise unemployable workers to build roads using picks and shovels.
B) Wilhelm, a petroleum engineer, is drafted, and his army salary is $1,000 per month.
C) Colleen quits her job to stay at home and raise her children.
D) A university employs a private contractor to build a field house on land it purchased at full market value from a local farmer.

Accepted Answer

In this situation, the money cost and opportunity cost are both equal to the full market value of the land and the construction project. Therefore, there is no divergence between the two costs. In the other situations, there are differences between the money cost and opportunity cost, such as the low wages paid to workers in option A or the opportunity cost of Wilhelm giving up his higher-paying job in option B. In option C, Colleen incurs an opportunity cost of giving up her salary and potential career growth to stay at home with her children.

Question 11

If a market system is functioning well, we can conclude that goods with
A) high opportunity costs tend to have high money costs.
B) low opportunity costs tend to have high money costs.
C) high opportunity costs tend to have low money costs.
D) low opportunity costs tend to have zero money costs.
E) high opportunity costs tend to have zero money costs.

Accepted Answer

In a well-functioning market system, the law of supply and demand should be at work. This means that as the opportunity cost of producing a good increases (meaning resources must be diverted from producing other goods), the price of that good should also increase in order to compensate producers for that opportunity cost. Therefore, goods with high opportunity costs tend to have high money costs.

Question 12

Ted got a ticket to this year's Super Bowl and paid the face value of $1,000. His cousin offered him $3,000 for the ticket. Given this information, Ted's opportunity cost of this ticket is
A) $1,000.
B) $2,000.
C) $3,000.
D) $4,000.

Accepted Answer

The answer of Ted got a ticket to this year's...

Question 13

Why would it be a mistake to treat opportunity costs and explicit monetary costs as identical?
A) Because sometimes the market does not function well.
B) Because opportunity costs are different for different goods.
C) Because there are trade-offs involved in any decision.
D) Because of existence of efficient markets.

Accepted Answer

The answer of Why would it be a mistake to...

Question 14

Ted got a ticket to this year's Super Bowl and paid the face value of $1,000. His cousin offered him $3,000 for the ticket. Ted chose to attend the game. From this, we can infer that Ted's value for this ticket was
A) less than $1,000.
B) more than $2,000.
C) at least $3,000.
D) the ticket price plus his cousin's offer, a total of $4,000.

Accepted Answer

The answer of Ted got a ticket to this year's...

Question 15

Rob took the afternoon off from his job as a tire salesman to mow his lawn. Rob told his wife that this made sense because he would be saving the $50 he would have to pay a lawn service, noting that this would be the opportunity cost to the family. Rob's wife disagreed. What did Rob's wife say?
A) The opportunity cost would be Rob's lost income from selling tires that afternoon plus the $50.
B) The opportunity cost would be Rob's lost income from selling tires that afternoon minus the $50.
C) That Rob just wanted to take the afternoon off.
D) The opportunity cost would be Rob's lost income from selling tires that afternoon.

Accepted Answer

Rob's wife likely pointed out that the opportunity cost of Rob mowing the lawn himself includes not just the $50 saved from not hiring a lawn service, but also the income he forfeits by not working that afternoon. This total opportunity cost is calculated by subtracting the $50 saved from the income he would have earned, indicating that the cost of the decision includes both the saved expense and the lost income.

Question 16

As the term "opportunity cost" is defined in the text, the opportunity cost of going to college includes
A) both tuition and the value of the student's time.
B) tuition but not the value of the student's time, which is a cash cost.
C) the value of the student's time but not tuition, which is a monetary cost.
D) neither tuition nor the value of the student's time, since obtaining a college degree makes one's income higher in the future.
E) neither tuition nor the value of the student's time, at least at subsidized state universities.

Accepted Answer

The opportunity cost of going to college includes both tuition and the value of the student's time. Tuition is a monetary cost, while the value of the student's time is the cost of the next best alternative use of that time (such as working or pursuing a different opportunity). Both of these costs should be considered when making the decision to attend college.

Question 17

A recent study found that it was cheaper to buy a chicken dinner from Kentucky Fried Chicken than it was to prepare it at home. The researcher included all costs including the imputed value of time involved to prepare the meal at home. This study illustrates the
A) value of marginal analysis.
B) law of increasing costs.
C) difference between real costs and money costs.
D) cost disease of the service sector.

Accepted Answer

The study highlights the difference between real costs (which include the imputed value of time and other non-monetary factors) and money costs (the actual cash spent to purchase goods or services). By accounting for the value of time, it demonstrates how the real cost of preparing a meal at home can exceed the money cost of buying it ready-made.

Question 18

Do all valuable items have price tags?
A) No, because some valuable items have no opportunity cost.
B) Yes, because everything has its price.
C) Yes, because price is the measure of opportunity cost.
D) No, some have no explicit price on them.
E) Yes, because only items that can be sold in markets have value.

Accepted Answer

Some valuable items, such as sentimental or personal items, may not have an explicit price tag on them. Additionally, the value of some items may be subjective and not easily quantifiable.

Question 19

How are money cost and opportunity cost related to each other?
A) If markets function well, they are closely related.
B) They are always identical in any economic system.
C) Opportunity cost must always exceed money cost.
D) Money cost is greater than or equal to opportunity cost.
E) In a market economy, they must be equal to each other.

Accepted Answer

In a well-functioning market, the opportunity cost of a choice is reflected in its money cost. This is because individuals will only purchase a good or service if they believe the benefits of the purchase outweigh the opportunity cost of alternative uses of their money. Therefore, the money cost and opportunity cost are closely related in a market economy.

Question 20

Money costs and opportunity costs are concepts that are
A) not related in any meaningful way.
B) used by tax accountants.
C) related through the relative prices of goods and services.
D) used by economists to learn the most efficient level of output.

Accepted Answer

Money costs and opportunity costs are related through the relative prices of goods and services. Money costs refer to the price paid for a good or service in terms of money, while opportunity costs refer to the value of the next best alternative foregone when a choice is made. The relative prices of goods and services determine both the money costs and opportunity costs. For example, if the money cost of buying a cup of coffee increases, the opportunity cost of buying the coffee also increases because there are other things that could have been done with that money. Economists use these concepts to make decisions about the most efficient use of resources.

Quiz 3: The Fundamental Economic Problem: Scarcity and Choice

The divergence between money costs and opportunity costs will be greatest in which of the following situations?

Rational production decisions require an understanding of

Which of the following is an example of opportunity cost not measured by money cost?

A ticket to an Eric Clapton concert costs $45. If you have a ticket, you can "scalp" it (sell it illegally) for $75. To a ticket holder, the opportunity cost of actually attending the concert is

Which of these options best reflects Jim's opportunity cost of operating his own business?

As a strategy to boost enrollment, in January 1996, a private college in Iowa offered free tuition for graduating high school seniors from the county where it is located. For students who accepted the offer, how did this offer affect the opportunity cost of attending college?

The money cost of a particular good will approximate its opportunity cost if

In a market economy, the decision regarding allocation of resources is made by

The opportunity cost and the money cost of a good

The divergence between money costs and opportunity costs is the smallest in which of the following situations?

If a market system is functioning well, we can conclude that goods with

Ted got a ticket to this year's Super Bowl and paid the face value of $1,000. His cousin offered him $3,000 for the ticket. Given this information, Ted's opportunity cost of this ticket is

Why would it be a mistake to treat opportunity costs and explicit monetary costs as identical?

Ted got a ticket to this year's Super Bowl and paid the face value of $1,000. His cousin offered him $3,000 for the ticket. Ted chose to attend the game. From this, we can infer that Ted's value for this ticket was

Rob took the afternoon off from his job as a tire salesman to mow his lawn. Rob told his wife that this made sense because he would be saving the $50 he would have to pay a lawn service, noting that this would be the opportunity cost to the family. Rob's wife disagreed. What did Rob's wife say?

As the term "opportunity cost" is defined in the text, the opportunity cost of going to college includes

A recent study found that it was cheaper to buy a chicken dinner from Kentucky Fried Chicken than it was to prepare it at home. The researcher included all costs including the imputed value of time involved to prepare the meal at home. This study illustrates the

Do all valuable items have price tags?

How are money cost and opportunity cost related to each other?

Money costs and opportunity costs are concepts that are