Question 1

Economic costs of an input include

Accepted Answer

Economic costs of an input include both implicit and explicit costs. Explicit costs are the direct outlay of money while implicit costs are the opportunity cost of using a resource for a particular purpose instead of the next best alternative. Both of these costs must be considered in order to accurately determine the true cost of using a resource.

Question 2

Variable costs are

Accepted Answer

Variable costs are expenses that vary with the quantity of output produced. This means that as production increases or decreases, the variable costs will increase or decrease accordingly. For example, if a company produces more goods, it will need to purchase more raw materials, and the cost of those materials will be a variable cost as it changes with the level of production.

Question 3

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 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 4

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 5

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

Accepted Answer

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

Question 6

Fixed costs are

Accepted Answer

Fixed costs are expenses that do not vary with output. This means that even if a company produces more or less output, the fixed costs remain the same. Examples of fixed costs include rent, salaries for permanent staff, and insurance premiums.

Question 7

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 income that the firm could have earned if it rented the building to another firm. This is the foregone opportunity of earning rent on the building. The mortgage payment or the price paid for the building is a sunk cost and does not represent the opportunity cost of using the building. Therefore, the correct answer is D.

Question 8

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 9

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

Accepted Answer

Waiting two months for health care in Canada has an opportunity cost, which is the loss of potential earnings or productivity during that time. This cost is not explicitly stated or accounted for, but it is a real cost that should be considered.

Question 10

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 11

Economic efficiency entails

Accepted Answer

Economic efficiency is achieved when a given amount of output is produced with the cheapest mix of inputs. This means that the cost of production is minimized and resources are used in the most efficient manner, leading to higher profits for firms and lower prices for consumers. Options A and C are incorrect because they involve using expensive or excessive inputs, which would increase the cost of production and reduce economic efficiency. Option B is incorrect because it does not consider the cost of inputs and could result in undue waste.

Question 12

The high cost of advertising during the Super Bowl will

Accepted Answer

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

Question 13

Which of the following statements is NOT true?

Accepted Answer

The correct formula for calculating AVC is AVC = VC/Q, where VC is total variable cost and Q is output quantity. The formula given in option C is incorrect and therefore not true.

Question 14

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 15

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

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 accounting practice, as it cannot be changed or undone.

Question 16

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

Accepted Answer

When economic profit is zero, it means that the revenue from selling a product is equal to the total costs incurred in producing it, both monetary and non-monetary. Therefore, firms are covering all their costs and are not making any extra profit, which is in line with the idea that in a competitive market, firms cannot sustain profits in the long run.

Question 17

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

Accepted Answer

Option A costs less than Option B but yields the same amount of output. Therefore, Option A is more economically efficient as it produces the same output at a lower cost.

Question 18

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 19

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

Accepted Answer

Marginal cost is defined as the additional cost incurred in producing one more unit of output. Therefore, the correct choice is A, as it directly relates to the definition of marginal cost. B and D are not correct choices as they deal with changes in other factors (capital and isoquants) and do not relate to the definition of marginal cost. C is also not correct as a change in average cost does not necessarily relate to the cost of producing one more unit of output.

Question 20

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 instead of focusing on a minor infraction.

Quiz 7: Costs