Question 1

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

If Simon did not go to Coldplay,he would see Sting,since he values seeing Sting for more than the resale value of the ticket.If he goes to Coldplay he can sell the Sting ticket,making an economic loss of $20 (80 - 60).Thus,the opportunity cost of seeing Coldplay is $20.Note: the $50 is not relevant in the calculations because the resale value is $60,not $50.

Question 2

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 opportunity cost of the land is the value of the next best alternative that was given up in order to purchase the land. In this case, the next best alternative was to sell the land for $1 million. Since the land is now worthless, the opportunity cost is $1 million.

Question 3

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 potential benefit the firm could have earned by renting it out to another firm. Therefore, the best measure of the monthly opportunity cost is the rent the firm could earn if it rented the building to another firm. The other options (A, B, and C) do not accurately represent the opportunity cost of the building.

Question 4

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 the economic downturn in 2008, the job market was poor, leading to a drop in the opportunity cost of attending an MBA program for most applicants. As a result, more individuals opted to pursue an MBA degree to enhance their job prospects once the economy recovered.

Question 5

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 6

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 measures the change in total cost that results from producing one additional unit of output.

Question 7

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 8

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 9

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 annual opportunity cost of the new business is the sum of her current salary ($40,000) and the foregone interest from her savings ($5,000, which is 10% of $50,000), totaling $45,000.

Question 10

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

Since the cost of Johnny's college degree in accounting is a past cost that cannot be recovered, it represents a sunk cost. It is not relevant to his decision to open his own public accounting practice.

Question 11

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 output. They are expenses that a company incurs regardless of the level of production. Examples of fixed costs include rent, insurance, and salaries. These costs do not change as the quantity of output produced changes.

Question 12

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 13

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 14

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. As output increases, variable costs also increase, while as output decreases, variable costs decrease. Examples of variable costs include raw materials, direct labor costs, and sales commissions.

Question 15

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 refer to the actual monetary expenses incurred to acquire an input (e.g. wages, rent, and material costs), while implicit costs refer to the opportunity costs of using a resource for a particular purpose instead of its next best alternative use (e.g. the income forgone by a business owner who could have worked for a salary). Therefore, economic costs include both the costs that are explicitly stated on a balance sheet as well as the costs that are not quantified but still represent real resource trade-offs. Option A and B are incorrect as they do not include all costs, and option D is incorrect as it implies that management can report whatever they want, which is not true.

Question 16

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 a competitive firm makes zero economic profit in the long run, it means that they are covering all their costs, both monetary (such as wages and utilities) and non-monetary (such as opportunity cost and the cost of time). This is a result of market forces driving prices down to the point where firms cannot earn profits, but can still cover their costs. Therefore, option C is the best choice.

Question 17

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 these two months, the individual could have been using their time, money, and resources on other activities. Additionally, if the health issue worsens during this time, the cost of treatment and recovery may increase.

Question 18

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

Sunk cost is a cost that has already been incurred and cannot be recovered. In this case, the firm has already spent $50,000 on the inventory, so the sunk cost is $50,000.

Question 19

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,a 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 rational response to both situations is the same because in each case, you are out $10. The source of the loss (a ticket or cash) doesn't change the economic impact on you.

Question 20

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...

Quiz 7: Costs

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

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

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

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.

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

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

Fixed costs are

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?

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 are

Economic costs of an input include

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

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

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?