Question 1

Ontel engineers proposed developing a 10-Gigahertz microprocessor in early 2011 at a cost of $20 million for a working prototype.By mid-2012,the $20 million had been spent with no prototype.The engineers request an additional $10 million to finish the project.For convenience,assume the marginal cost of producing the chip once it is developed is zero.
-In early 2011,sunk costs of this project were __________ and,in mid-2012,sunk costs were __________.

Accepted Answer

In early 2011, no money had been spent yet, so sunk costs were $0. By mid-2012, the $20 million had already been spent, making it a sunk cost.

Question 2

Ian paid $475 for an airline ticket to fly to Acapulco,Mexico for a spring break vacation.Unfortunately,he fell ill and could not go to Acapulco.When he called the airline to cancel the ticket,he was reminded that the ticket was non-refundable,but that he could exchange it for another ticket within one year if he pays a $75 fee at the time of the exchange.Several months later he is deciding whether to exchange the ticket for a ticket of the same price to Acapulco.The opportunity cost of going to Acapulco would equal

Accepted Answer

The answer of Ian paid $475 for an airline ticket...

Question 3

Ontel engineers proposed developing a 10-Gigahertz microprocessor in early 2011 at a cost of $20 million for a working prototype.By mid-2012,the $20 million had been spent with no prototype.The engineers request an additional $10 million to finish the project.For convenience,assume the marginal cost of producing the chip once it is developed is zero.
-If the expected revenues of a 10-Gigahertz chip are $15 million,Ontel should

Accepted Answer

The answer of Ontel engineers proposed developing a 10-Gigahertz microprocessor...

Question 4

-The least important cost(s)in deciding the fate of the project is the

Accepted Answer

Research and development expenditures to date are sunk costs and should not influence the decision about the future of the project.

Question 5

Ontel engineers proposed developing a 10-Gigahertz microprocessor in early 2011 at a cost of $20 million for a working prototype.By mid-2012,the $20 million had been spent with no prototype.The engineers request an additional $10 million to finish the project.For convenience,assume the marginal cost of producing the chip once it is developed is zero.
-In deciding whether to continue the 10-Gigahertz chip,Ontel executives should compare the __________ to the expected revenues.

Accepted Answer

The relevant cost for the decision of whether to continue the project or not is the additional $10 million required to finish the project. The $20 million spent so far is a sunk cost and should not be considered in the decision-making process. Therefore, the correct choice is option C - extra $10 million.

Question 6

Sunk costs are different from other concepts of costs in that they

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered regardless of what course of action is taken. They should not be factored into future decision making as they cannot be changed.

Question 7

Jack has a ticket to see a concert,which he paid $30 for yesterday.He takes an unpaid day off from work to get ready for the concert.When he arrives at the concert,5 different people offer him $70 for his ticket.The cost to Jack of seeing the concert is now

Accepted Answer

The answer of Jack has a ticket to see a...

Question 8

A cost that cannot be recovered at the time a decision is being made is termed a(n)

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, and therefore should not be considered in a decision-making process. Marginal cost is the additional cost of producing one more unit, scarcity cost is not a commonly used economic term, average cost is the total cost divided by the number of units produced, and opportunity cost is the cost of the next best alternative foregone.

Question 9

You started a new business and your twin sister helped you out for free while she turned down a project that would have paid her a total of $200.When calculating the costs involved in starting up the new business,you should

Accepted Answer

The best choice is to include $200 as the opportunity cost of your sister's labour. Opportunity cost refers to the value of the next best alternative that is forgone when a particular choice is made. In this case, your sister gave up an opportunity to earn $200 by helping you out for free. Hence, the $200 should be included as a cost in the calculation of starting the new business.

Question 10

While eating dinner one evening,you receive a phone call from a telemarketing firm.The firm's representative informs you that your name is one of only five names drawn in a recent lottery.Each of the five people will receive a prize.In order to claim your prize,however,you must visit Summer Resorts,Inc.the following Friday (with no commitment to purchase anything),take a 90 minute tour of their facilities,and,at that time,your prize will be awarded.In order to visit Summer Resorts,Inc.the next Friday,you would have to miss 8 hours of work ($15 per hour),pay for the gas to drive there and back home ($20),and buy lunch ($10).Because you won't go to work that day you won't have to pay the $3 for gas to drive to and from work,nor pay to park,for which you have a monthly pass that costs $50.Using cost-benefit analysis,you determine that it is rational for you to visit Summer Resorts,Inc.if the prize has a minimum value to you of

Accepted Answer

The answer of While eating dinner one evening,you receive a...

Question 11

The reason sunk costs are irrelevant to decision making is that

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They should be ignored in decision making because they are irretrievable and will not change regardless of the decision made. Therefore, the best choice is C, as regardless of the decision made, the sunk costs will still be the same.

Question 12

David finds he has one hour of time in the evening to allocate on the first day of the new semester. He can do one of two things. He can watch TV for one hour or he can open his economics textbook and read for an hour. The benefit of watching TV is 30; the benefit of reading about economics is 20.
-Suppose that,instead of the first day of the semester,it is the night before David's first exam in economics.One could reasonably predict that the

Accepted Answer

The opportunity cost of watching TV will rise because the benefit of reading about economics increases as the exam approaches, making the cost of not studying higher.

Question 13

A campus organization is holding a lottery to raise money.The cost of a ticket is $2 but the buyer can choose to either receive the prize money all at once or half at the time of the drawing and the remainder in 3 months.To ensure that all buyers do not make the same choice,the structure of the prizes must be such that

Accepted Answer

To incentivize different choices, the all-at-once prize should be smaller than the total of the half-and-half prize, encouraging some buyers to choose the immediate smaller amount and others to wait for the larger total.

Question 14

Suppose Darlene purchased a computer 2 weeks ago for $2,000.Today she can purchase a new computer that is twice as fast for $1,400.She also discovers that her current computer sells used for $300.The sunk cost of her current computer is

Accepted Answer

The answer of Suppose Darlene purchased a computer 2 weeks...

Question 15

-Which of the costs listed in the table are sunk costs?

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. Expenditures on research and development are considered sunk costs because they are spent in the past and cannot be recovered regardless of future actions.

Question 16

Dillon purchased his nonrefundable,nontransferable ticket to see the M.C.Hammer/Vanilla Ice Career Revival show for $30 last week;Bob has yet to buy his ticket,but wants to go.In deciding whether to go to the show,the price of the ticket is a __________ to Dillon and a __________ to Bob.

Accepted Answer

For Dillon, the ticket price is a sunk cost because he has already paid for it and cannot recover it. For Bob, the ticket price is a relevant cost because he has not yet purchased it and it will affect his decision to attend the show.

Question 17

Sonja owns a business that pays her a salary of $50,000 plus the potential for future profits.She is considering an offer for a top management position with another firm at a salary of $75,000 per year.

Accepted Answer

The opportunity cost of accepting the management position is the potential future profits from her current business, which should be considered in a cost-benefit analysis.

Question 18

The cost of spending an evening partying instead of studying economics is

Accepted Answer

The cost of spending an evening partying instead of studying economics is the resulting decrease in the test score in Economics, as the student may miss out on valuable studying time and material that could have potentially improved their understanding and performance on the test. The other options listed may also incur costs, but they are not directly related to the partying vs. studying decision.

Question 19

Ontel engineers proposed developing a 10-Gigahertz microprocessor in early 2011 at a cost of $20 million for a working prototype.By mid-2012,the $20 million had been spent with no prototype.The engineers request an additional $10 million to finish the project.For convenience,assume the marginal cost of producing the chip once it is developed is zero.
-A senior executive at Ontel argues that the engineers should only be granted the additional $10 million if Ontel can collect $30 million in revenues after the chip is developed.The executive's argument is

Accepted Answer

The correct answer is D because the $20 million already spent is a sunk cost, which means it cannot be recovered and should be ignored when making future decisions. The only relevant cost for the decision to invest an additional $10 million is the future revenue of $30 million. Therefore, the senior executive's argument is incorrect because it is based on a sunk cost rather than the marginal cost of production. The answer is not E because there is sufficient information to determine the correct answer based on the concept of sunk costs.

Question 20

If you make an interest-free loan of $10,000 to a friend to help her get started in her new business and the interest rate charged by banks on similarly-risky loans is 15%,then the opportunity cost of the loan is equal to

Accepted Answer

The opportunity cost of a decision is the cost of the next best alternative. In this case, if you did not lend the $10,000 to your friend, you could have invested that money in a bank and earned a 15% interest rate. Therefore, the opportunity cost of not investing the $10,000 is equal to the interest you could have earned, which is $1,500 (15% of $10,000). So the best choice is (B) $1,500.

Quiz 1: Measuring Macroeconomic Performance: Output and Prices

-The least important cost(s) in deciding the fate of the project is the