Question 1

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 incurred by producing one additional unit of output. Therefore, option A is correct as it defines marginal cost as the change in total cost if the firm produces one more unit of output. Option B is incorrect as buying more capital would affect the firm's fixed costs, not its marginal costs. Option C is incorrect as marginal cost is a function of variable costs, not average costs. Option D is incorrect as moving to the next highest isoquant would involve changing both the firm's inputs and output and would not necessarily result in a uniform change in marginal cost.

Question 2

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 3

Why might a police officer not pull over someone speeding two miles over the speed limit?
A) The explicit costs of stopping the driver over are too high.
B) The opportunity costs of stopping the driver are too high.
C) The opportunity costs of topping he driver are too low.
D) The explicit costs of stopping the driver are too low.

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 instead of focusing on a minor infraction.

Question 4

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 5

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 6

If Option A costs $40 and yields 20 units of output,and Option B costs $50 and yields 30 units of output,
A) Option B and Option A are equally economically efficient.
B) Option B is economically efficient relative to Option A.
C) Option A is economically efficient relative to Option B.
D) It is not possible to determine which option is more economically efficient.

Accepted Answer

The answer of If Option A costs $40 and yields...

Question 7

Economic efficiency entails
A) producing a given amount of output with the most expensive mix of inputs.
B) producing a given amount of output with the least number of inputs.
C) producing a given amount of output with the most inputs.
D) producing a given amount of output with the cheapest mix of inputs.

Accepted Answer

Economic efficiency is achieved when a given amount of output is produced using the cheapest mix of inputs. This is because minimizing the cost of production for the same level of output maximizes profits for the firm. Therefore, option D is the correct choice.

Question 8

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 production expenses that change with the quantity of output produced. Examples of variable costs include raw materials and labor costs.

Question 9

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 because it has already been incurred and cannot be recovered. It is not relevant to his decision to open his own public accounting practice. The opportunity cost of this endeavor would be the potential income he could earn by working for someone else instead of starting his own business. Expenses and variable costs are ongoing costs associated with running a business.

Question 10

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

Opportunity cost refers to the trade-off that must be made when choosing one option over another. In Sarah's case, her opportunity cost is the income she is giving up by quitting her job to run her own business. Therefore, her annual opportunity cost is equal to her salary of $40,000 per year. She is not giving up her savings of $50,000 with an annual 10% rate of return because she plans to invest it in the business. Therefore, the correct answer is option C, which is $45,000.

Question 11

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.A similar office space in the same building rents for $545 per month.What is the economic profit earned by Joey's dad?
A) Profit of $245
B) Profit of $100
C) Loss of $100
D) Loss of $245

Accepted Answer

Joey's dad incurs an economic loss of $245 because he could have rented the office space to someone else for $545, but instead rents it to Joey for $300, missing out on the additional income.

Question 12

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 13

If Option A costs $40 and yields 20 units of output,and Option B costs $50 and yields 20 units of output,
A) Option B and Option A are equally economically efficient.
B) Option B is economically efficient relative to Option A.
C) Option A is economically efficient relative to Option B.
D) It is not possible to determine which option is more economically efficient.

Accepted Answer

Option A has a lower cost of $40 compared to Option B's cost of $50 to yield the same amount of output. Therefore, Option A is economically efficient relative to Option B as it achieves the same output at a lower cost.

Question 14

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 monthly opportunity cost of the building is the rent that the firm could earn by renting the building to another firm. This is because the firm is forgoing the opportunity to earn rent by using the building for its own purposes. The monthly mortgage payment is a cost that the firm has to incur regardless of whether it uses the building or not, so it is not a measure of opportunity cost. The price the firm paid divided by twelve is the monthly depreciation expense, which is not a measure of opportunity cost either. The opportunity cost is not zero because the firm could have earned rent by leasing out the building to another firm.

Question 15

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 16

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

Economic costs of an input include both implicit and explicit costs. Explicit costs are the actual monetary expenses incurred by a firm, such as wages, rent, and supplies. Implicit costs, on the other hand, refer to the opportunity cost of using the firm's resources to produce a particular good or service instead of using them for alternative purposes. Both of these costs are relevant in economic decision making and are necessary to determine the true cost of production. The answer D is incorrect as the costs reported to shareholders may not reflect the true economic costs of production.

Question 17

The high cost of advertising during the Super Bowl will
A) not affect the efficient level of output because advertising is a sunk cost.
B) will affect the efficient level of output because profits will fall significantly.
C) not affect the efficient level of output because advertising is a fixed cost.
D) Not enough information given.

Accepted Answer

The answer of The high cost of advertising during the...

Question 18

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 competitive firms make zero economic profit in the long run, it means that they are covering all their costs, both monetary and non-monetary. This is because if they were not, they would either go out of business or change their production method to minimize costs and increase profits. Therefore, it shows that in competitive markets, firms must produce efficiently and cover all their costs to survive in the long run.

Question 19

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 expenses that do not vary with the quantity of output produced. These expenses include things like rent, salaries, and insurance. They are constant regardless of how many units of output a firm produces.

Question 20

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 because during those two months, the person may be unable to work or perform daily activities, which could result in a loss of income or other missed opportunities. This is not an explicit or accounting cost because there is no direct monetary cost associated with waiting, and it is not accurate to say there is no real cost since the person is experiencing a debilitating problem that is impacting their quality of life.

Quiz 7: Costs

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

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.

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

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.

If Option A costs $40 and yields 20 units of output,and Option B costs $50 and yields 30 units of output,

Economic efficiency entails

Variable costs are

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

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

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.A similar office space in the same building rents for $545 per month.What is the economic profit earned by Joey's dad?

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.

If Option A costs $40 and yields 20 units of output,and Option B costs $50 and yields 20 units of output,

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

Economic costs of an input include

The high cost of advertising during the Super Bowl will

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

Fixed costs are

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