Question 1

Variable costs are

Accepted Answer

Variable costs are production expenses that change as the quantity of output produced changes. This means that as a firm produces more units, their variable costs will increase, and as they produce fewer units, their variable costs will decrease.

Question 2

You have two career options.You can work for someone else for $50,000 a year,or,you can run your own business,with an annual revenue of $100,000,and explicit costs of $40,000 annually.Explain which career option a profit-maximizer would select and why.

Accepted Answer

The answer of You have two career options.You can work...

Question 3

Variable costs

Accepted Answer

Variable costs decrease with decreasing output because they are directly proportional to the level of output.

Question 4

Average fixed cost (AFC)

Accepted Answer

AFC is the fixed cost per unit of output and is calculated by dividing the total fixed cost by the quantity produced. As output falls, the fixed cost gets spread over fewer units, causing AFC to rise. Conversely, as output rises, the fixed cost gets spread over more units, causing AFC to fall. Therefore, option B is correct.

Question 5

Average variable cost (AVC)

Accepted Answer

Average variable cost (AVC) is calculated by dividing the total variable cost by the quantity of output produced. Therefore, choice B is correct. Choice A is incorrect because it divides variable cost by the sales price, which is not the correct calculation for AVC. Choice C is incorrect because AFC is only equal to zero when no output is produced. Choice D is incorrect because AFC can be higher or lower than AVC, depending on the level of output produced.

Question 6

Fixed costs

Accepted Answer

Fixed costs are costs that do not vary with changes in production or sales level, such as rent on a building or salaries of employees. They can be either avoidable or unavoidable, but they are always considered sunk costs once they have been paid. In other words, they cannot be recovered even if the business ceases operations. Therefore, choice C is correct as fixed costs can sometimes be classified as sunk costs. Choices A, B, and D are incorrect as they do not accurately describe the nature of fixed costs.

Question 7

Which of the following statements is NOT true?

Accepted Answer

The answer of Which of the following statements is NOT...

Question 8

When buying a piece of equipment,it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.

Accepted Answer

It depends.The opportunity cost of the capital when paying cash is the interest the firm receives on its cash reserves.This is an implicit cost.The opportunity cost of the capital when the funds are borrowed is the interest the firm must pay to the lender.This is an explicit cost.If the rate the firm receives on its cash reserves exceeds the rate at which it borrows,the firm is better off borrowing the funds to buy the equipment.

Question 9

A firm's marginal cost can always be thought of as the change in total cost if

Accepted Answer

Marginal cost is the additional cost of producing one more unit of output, so it is directly related to the change in total cost when producing one more unit of output.

Question 10

Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer.The cost of your education will matter for your decision.

Accepted Answer

At this point the cost of your education represents a sunk cost and therefore should not figure into your decision.You incur it no matter what decision you make.

Question 11

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.

Accepted Answer

The accountant uses a set of predetermined rules to amortize the total expense of the good.The economist amortizes based on the opportunity cost of the good,which may never sum to the total expense of the good.

Question 12

Marginal cost is

Accepted Answer

Marginal cost is the change in total cost that arises when the quantity produced changes by one unit. As total cost generally increases with production, marginal cost will be positive or zero. Therefore, the best choice is A.

Question 13

Fixed costs are

Accepted Answer

Fixed costs are expenses that do not vary with output. These expenses remain the same regardless of the level of production. Examples of fixed costs include salaries, rent, and insurance premiums.

Question 14

Average fixed cost (AFC)

Accepted Answer

Average fixed cost is the fixed cost divided by the quantity of output produced. Option A does not correctly represent the calculation for AFC, option C is true but not relevant to calculating AFC, and option D is not necessarily true as it depends on the specific values of fixed and variable costs.

Question 15

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

Accepted Answer

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

Question 16

When a firm produces one unit,the variable cost is $3.When the firm produces two units,the variable cost is $6.What is the marginal cost associated with two units of production?

Accepted Answer

Marginal cost is the additional cost incurred by producing one more unit of a product. In this case, the cost of producing the second unit is $6 - $3 = $3, making the marginal cost $3.

Question 17

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.Joey's dad is thinking of increasing the rent to $400 per month.As a result Joey's marginal cost of cutting grass will

Accepted Answer

Joey's marginal cost of cutting grass will not change because the rent increase does not directly affect the cost of materials or labor needed to cut the grass.

Question 18

Average variable cost (AVC)

Accepted Answer

Average variable cost (AVC) may either increase, decrease, or remain flat with increased output. This is because AVC is the total variable cost divided by the quantity of output, and the behavior of variable costs can vary depending on the production process and other factors. In general, AVC tends to decline initially due to economies of scale, but at some point, it may start to increase again due to diseconomies of scale, such as increased labor costs or equipment breakdowns.

Question 19

If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it,the sunk cost is

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. In this scenario, the firm has already purchased the specialized metal stamping machine for $125,000 and cannot resell it. Therefore, the sunk cost is the full amount of $125,000.

Question 20

If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it,the opportunity cost is

Accepted Answer

The answer of If a firm buys a specialized metal...

Quiz 6: Costs

Variable costs are

You have two career options.You can work for someone else for $50,000 a year,or,you can run your own business,with an annual revenue of $100,000,and explicit costs of $40,000 annually.Explain which career option a profit-maximizer would select and why.

Variable costs

Average fixed cost (AFC)

Average variable cost (AVC)

Fixed costs

Which of the following statements is NOT true?

When buying a piece of equipment,it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.

A firm's marginal cost can always be thought of as the change in total cost if

Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer.The cost of your education will matter for your decision.

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.

Marginal cost is

Fixed costs are

Average fixed cost (AFC)

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

When a firm produces one unit,the variable cost is $3.When the firm produces two units,the variable cost is $6.What is the marginal cost associated with two units of production?

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.Joey's dad is thinking of increasing the rent to $400 per month.As a result Joey's marginal cost of cutting grass will

Average variable cost (AVC)

If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it,the sunk cost is

If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it,the opportunity cost is