Question 1

A firm built an inventory of 16-bit chips for $50,000 last year.However,the introduction of 32-bit chips lowers the market price for 16-bit chips and the inventory can only be sold for $40,000 now.What is the sunk cost?
A) $50,000
B) $40,000
C) $10,000
D) $90,000

Accepted Answer

C

Question 2

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
A) the monthly mortgage payment the firm must pay.
B) the price the firm paid divided by twelve.
C) zero.
D) the rent the firm could earn if it rented the building to another firm.

Accepted Answer

The opportunity cost of the building is the income the firm could earn if it rented the building to another firm. This represents the foregone opportunity to earn income by choosing to use the building for the firm's own needs instead of renting it out. The mortgage payment or the purchase price of the building do not accurately reflect this opportunity cost.

Question 3

For the following, please answer "True" or "False" and explain why.
-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 4

A firm built an inventory of 16-bit chips for $50,000 last year.However,the introduction of 32-bit chips lowers the market price for 16-bit chips and the inventory can only be sold for $40,000 now.What is the opportunity cost of the inventory of 16-bit chips?
A) $50,000
B) $40,000
C) $10,000
D) $90,000

Accepted Answer

The answer of A firm built an inventory of 16-bit...

Question 5

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
A) $0.
B) $1 million.
C) some amount greater than $0 but less than $1 million.
D) equal to the cost of the factory that was planned to be built there.

Accepted Answer

The answer of The Nifty Gum Co.has purchased a large...

Question 6

Your company makes copper pipes.Over the years,you have collected a large inventory of raw copper.The production process involves melting the copper and shaping it into pipes.You also have a large stockpile of pennies.Suppose the price of copper rises so much that the copper in the penny becomes worth more than one cent.Should you melt down your pennies?

Accepted Answer

The answer of Your company makes copper pipes.Over the years,you...

Question 7

For the following, please answer "True" or "False" and explain why.
-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 8

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
A) $0.
B) $40,000.
C) $45,000.
D) $90,000.

Accepted Answer

The opportunity cost is the income Sarah is giving up by leaving her current job. So, her opportunity cost would be equal to her current salary of $40,000 per year.

However, since Sarah is investing her savings of $50,000 into the business and earning an annual 10% rate of return, this means that she is earning an additional $5,000 per year ($50,000 x 0.10 = $5,000) from her investment.

Therefore, the total opportunity cost for Sarah's new business would be her current salary of $40,000 minus the $5,000 she is earning from her investment, which equals $35,000. Therefore, the correct answer is C) $45,000.

Question 9

Simon is given a free ticket to see Coldplay Saturday night.He already has a ticket to see Sting in concert that night.The Sting ticket cost Simon $50 though he would have paid as much as $80 to go to the show.Simon knows that he can easily sell the Sting ticket on Craigslist for $60.What is his opportunity cost of seeing Coldplay?

Accepted Answer

The answer of Simon is given a free ticket to...

Question 10

The cost of waiting two months for health care to address a debilitating problem in Canada is most accurately described as
A) an explicit cost.
B) an accounting cost.
C) no real cost.
D) an opportunity cost.

Accepted Answer

The cost of waiting two months for health care in Canada is an opportunity cost. This is because the person who is waiting has to forgo other opportunities such as continuing their daily routine or working, which may result in a loss of income. Therefore, the cost of waiting is not just in terms of the medical expenses, but also in terms of the lost opportunities.

Question 11

Economic costs of an input include
A) only implicit costs.
B) only explicit costs.
C) both implicit and explicit costs.
D) whatever management wishes to report to the shareholders.

Accepted Answer

The economic costs of an input include both implicit costs (opportunity costs of resources owned by the firm) and explicit costs (monetary payments for resources purchased by the firm).

Question 12

Variable costs are
A) a production expense that does not vary with output.
B) a production expense that changes with the quantity of output produced.
C) equal to total cost divided by the units of output produced.
D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Accepted Answer

Variable costs are expenses that change with the quantity of output produced, such as materials and labor costs. Option A is describing a fixed cost, which does not change with output. Option C is describing average cost, which is total cost divided by the units of output produced. Option D is describing marginal cost, which is the amount by which a firm's cost changes if the firm produces one more unit of output.

Question 13

A firm's marginal cost can always be thought of as the change in total cost if
A) the firm produces one more unit of output.
B) the firm buys one more unit of capital.
C) the firm's average cost increases by $1.
D) the firm moves to the next highest isoquant.

Accepted Answer

Marginal cost is the additional cost of producing one more unit of output. Therefore, the change in total cost when one more unit of output is produced represents the firm's marginal cost.

Question 14

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 15

Economists proclaim that competitive firms make zero economic profit in the long run.This shows how
A) detached economists are from the real world.
B) unrealistic economic theory is.
C) firms cover all their cost, both monetary and non-monetary.
D) firms cover only monetary cost when economic profits are zero.

Accepted Answer

When economists state that competitive firms make zero economic profit in the long run, they mean that firms cover all their costs, including both monetary costs (like wages, rent, and materials) and non-monetary costs (like the opportunity cost of the owners' time and effort). This doesn't mean that firms don't earn any accounting profit (which only considers monetary costs), but rather that they don't earn any additional profit beyond what is necessary to cover all costs. This is because in a competitive market, firms can't sustainably charge prices above their costs, as other firms will enter the market and compete away any profits. Thus, firms in a competitive market must strive to minimize their costs in order to remain competitive.

Question 16

Consider the following two situations.
(i) You purchase a $10 movie ticket in advance over the Internet,but when arriving at the theater,you realize that you lost the ticket.The only way to see the movie is to purchase a new ticket.
(ii) On the way to seeing a movie,you drop a $10 bill.You still can afford the movie,but you have lost the $10.
How should you,rational person,respond to the two situations?
A) You should still see the movie in both situations.
B) You should respond the same way to each situation, whether it is to see the movie or not.
C) In the first situation, you should skip the movie; in the second, you should still see the movie.
D) In each situation, you should not see the movie.

Accepted Answer

The answer of Consider the following two situations.
(i) You purchase...

Question 17

Johnny has worked as a CPA for five years and wants to open his own public accounting practice.The cost of his college degree in accounting represents
A) the opportunity cost of this endeavor.
B) a sunk cost.
C) an expense.
D) a variable cost.

Accepted Answer

The cost of Johnny's college degree in accounting is a sunk cost, meaning it is a cost that has already been incurred and cannot be recovered. It is not relevant to the decision of whether or not to open his own practice. The opportunity cost of this endeavor would be the salary and benefits he could earn by continuing to work for someone else, while a variable cost would be a cost that varies with the level of business operations, such as rent or salaries for employees.

Question 18

Applications to MBA programs rose during the economic downturn in 2008.This is best explained by:
A) The opportunity cost of attending an MBA dropped for most applicants due to poor job prospects.
B) More teachers were available to teach MBA classes due to the lower opportunity cost of teaching.
C) The explicit costs of attending an MBA program fell in 2008.
D) The implicit costs of attending an MBA program rose in 2008.

Accepted Answer

During economic downturns, job prospects are poor and individuals may consider going back to school or pursuing additional education to improve their job prospects. The opportunity cost of attending an MBA program, which includes both the explicit costs (tuition, fees, etc.) and implicit costs (foregone wages and other opportunities), may be lower during an economic downturn since job prospects are worse and there may be fewer alternative opportunities available.

Question 19

For the following, please answer "True" or "False" and explain why.
-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 20

Fixed costs are
A) a production expense that does not vary with output.
B) a production expense that changes with the quantity of output produced.
C) equal to total cost divided by the units of output produced.
D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Accepted Answer

Fixed costs are production expenses that do not vary with the quantity of output produced. Examples of fixed costs include rent, salaries, and insurance premiums. These expenses still need to be paid regardless of how much or how little output is produced.

Quiz 7: Costs

A firm built an inventory of 16-bit chips for $50,000 last year.However,the introduction of 32-bit chips lowers the market price for 16-bit chips and the inventory can only be sold for $40,000 now.What is the sunk cost?

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

For the following, please answer "True" or "False" and explain why. -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 built an inventory of 16-bit chips for $50,000 last year.However,the introduction of 32-bit chips lowers the market price for 16-bit chips and the inventory can only be sold for $40,000 now.What is the opportunity cost of the inventory of 16-bit chips?

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

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 cost of waiting two months for health care to address a debilitating problem in Canada is most accurately described as

Economic costs of an input include

Variable costs are

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

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.

Economists proclaim that competitive firms make zero economic profit in the long run.This shows how

Johnny has worked as a CPA for five years and wants to open his own public accounting practice.The cost of his college degree in accounting represents

Applications to MBA programs rose during the economic downturn in 2008.This is best explained by:

For the following, please answer "True" or "False" and explain why. -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.

Fixed costs are