ECO 3320

CHAPTER 3

1)You and two partners start a company. However, your partners play no role in running the company. You devote all our time and talent to run your own business rather than working for someone else. You incur an(a):

1. 1. explicit cost.
   2. marginal cost.
   3. sunk cost
   4. opportunity cost.

2. A business owner makes 1000 items a day. Each day he/she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the firm’s accounting profit for the month equals:

a) $300,000

b) $60,000

c)   $450,000

d)   $240,000

3. A business owner makes 1000 items a day. Each day he/she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the economic profit for the month equals:

a) $300,000

b) $60,000

c)   $450,000

d)   $240,000

4. The opportunity cost of an action:
   1. is equal to the marginal cost of an action
   2. is equal to explicit cost
   3. is equal to the next best alternative forgone
   4. is the total cost of an action

5. Economists argue that:
   1. accounting costs consider all types of costs including implicit costs
   2. there is an opportunity cost associated with all decisions.
   3. economic decisions do not have opportunity costs but other decisions do.
   4. economic decisions should consider sunk costs

6. James used $250,000 from his savings account that paid an annual interest of 15% to purchase a hardware store. After one year, James sold the business for 320,000. His accountant calculated his profit to be:

a) $320,000

b) $70,000

c) $282,500

d) $32,500

7. James used $250,000 from his savings account that paid an annual interest of 15% to purchase a hardware store. After one year, James sold the business for 320,000. An economist calculated his profit to be:

a) $320,000

b) $70,000

c) $282,500

d)   $32,500

8. Variable costs are
   1. costs that vary with output
   2. equal marginal costs
   3. not considered in decision-making
   4. equal to total costs

9. Economic Value Added helps firms to avoid the hidden-cost fallacy
   1. by ignoring the opportunity costs to using a capital
   2. by differentiating between sunk and fixed costs
   3. by taking all capital costs into account including the cost of equity
   4. none of the above

10. A manager invests $400,000 in a technology to reduce overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. After a year, the manager has an opportunity to outsource production to another company at a cost per unity of $1.75. If you are the manager, you
    1. should consider the $400,000 as sunk cost and therefore it should not be relevant to the decision.
    2. should base your decision upon economic profit and not accounting profit
    3. should avoid the fixed-cost fallacy
    4. all the above

11. Which of the following statements is true?
    1. Economic profits ignore implicit costs and revenues.
    2. Although implicit costs do not show up in accounting profits, they nevertheless affect managerial decisions.
    3. Although explicit costs do not show up in accounting profits, they nevertheless affect managerial decisions.
    4. Economists consider sunk costs in their decision making

12. In the short-run:
    1. All costs are variable
    2. Some costs are fixed and some costs are variable
    3. There are no fixed inputs
    4. The firm is not constrained to vary output

13. Accountants and Economists differ in their calculations of profits in that the former consider
    1. sunk costs
    2. implicit costs only
    3. explicit costs only

1. 4. fixed costs

14. A business owner makes 50 items a day. Each day he/she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $10 an hour. The item sells for $10 each. Production does not stop during weekends. If the explicit costs total $10,000 for 30 days, the accounting profit for the month equals:

a)   $1,760

b)   $2,240

c) $11,760

d) $5,000

15. A business owner makes 50 items a day. Each day he/she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $10 an hour. The item sells for $10 each. Production does not stop during weekends. If the explicit costs total $10,000 for 30 days, the economic profit for the month equals:

a)   $2,600

b)   $2,240

c) $11,760

d)   $5,000

16. Opportunity costs arise due to
    1. Resource scarcity
    2. Interest rates
    3. Limited wants
    4. Preferences

17. Opportunity cost of an activity
    1. Is known to all parties
    2. Can not be measured in dollar terms
    3. May include both monetary costs and foregone incomes
    4. Is known with all certainty

18. James used $200,000 from his savings account that paid an annual interest of 10% to purchase a hardware store. After one year, James sold the business for 300,000. His accountant calculated his profit to be:

a)   $300,000

b)   $100,000

c) $80,000

d) $20,000

19. James used $200,000 from his savings account that paid an annual interest of 10% to purchase a hardware store. After one year, James sold the business for 300,000. An Economist calculated his profit to be:

a)   $300,000

b)   $100,000

c)   $80,000

d)   $20,000

20. After graduating from college, Jim had three choices, listed in order of preference: (1)

Move to Florida from Philadelphia, (2) work in a car dealership in Philadelphia, or (3) play soccer for a minor league in Philadelphia. His opportunity cost of moving to Florida includes

1. 1. the benefits he could have received from playing soccer
   2. the income he could have earned at the car dealership
   3. both a and b
   4. cannot be determined from the given information

21. A car dealership union negotiates a contract that dramatically increases all salesmen salaries. If one of the salesman is thinking of changing careers to be a hardware salesman, his opportunity cost
    1. would not be affected
    2. would increase if he continued to be a car salesman
    3. of becoming a hardware salesman would increase
    4. none of the above

22. Jim is planning on attending a football game that costs $40. He will have to take the day off from the work losing 8 hours of work. His hourly wage is $10. He estimates it will cost him around $20 for gas and parking at the game. Jim’s total economic cost of attending the game equals

a)   $80

b)   $40

c)   $20

d) $140

23. Jim is planning on attending a football game that costs $40. He will have to take the day off from the work losing 8 hours of work. His hourly wage is $10. He estimates it will cost him around $20 for gas and parking at the game. Jim’s implicit (opportunity) cost of attending the game equals

a)   $80

b)   $40

c)   $20

d) $140

24. A professor will sometimes pay higher prices for some goods compared to an undergraduate student because
    1. They value the item more than the student
    2. They like wasting money
    3. crowded and understaffed discount stores impose higher time costs
    4. they like to show off

25. Shifting resources away from producing one good in order to produce another is an example of
    1. Unlimited resources
    2. Limited wants
    3. Opportunity cost
    4. None of the above

26. Susan can bake 200 cookies in an hour or watch her favorite tv show. If she chooses to watch her show, her opportunity cost is
    1. 200 cookies
    2. 100 cookies
    3. 150 cookies
    4. Need more information

27. Fixed costs are
    1. costs that vary with output
    2. equal marginal costs
    3. costs that do not vary with output
    4. equal to total costs

28. A manager invests $400,000 in a technology to reduce overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. This affects
    1. Economic profits
    2. Accounting profits
    3. Both a and b
    4. None of the above

29. A manager invests $400,000 in a technology to reduce overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. Ceteris peribus, if the firm continues its production in the same economic environment, the firms accounting profits should
    1. increase
    2. decrease
    3. stay the same
    4. does not affect profits

30. A manager invests $400,000 in a technology to reduce overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. Ceteris peribus, if the firm continues its production in the same economic environment, the firms economic profits should
    1. increase
    2. decrease
    3. stay the same
    4. increase as long as the investment does not generate implicit costs that are greater than $0.15 per unit

31. A business incurs the following costs per unit: Labor - $5/unit; Materials $3/unit and rent -

$5000/month. If the firm produces 1000 units a month, the total variable costs equals a) $5,000

b)   $8,000

c)   $13,000

d)   $10,000

32. A business incurs the following costs per unit: Labor - $5/unit; Materials $3/unit and rent -

$5000/month. If the firm produces 1000 units a month, the total fixed costs equals a) $5,000

b)   $8,000

c) $13,000

d) $3,000

33. A business incurs the following costs per unit: Labor - $5/unit; Materials $3/unit and rent -

$5000/month. If the firm produces 1000 units a month, the total costs equals a) $5,000

b)   $8,000

c) $13,000

d) $3,000

34. A company currently sells 10,000 units at $9/unit and makes $20,000 accounting profit. Variable costs currently stand at $6 per unit. By how much would variable costs have to increase before the company makes zero accounting profits?

a)   $1.00

b)   $2.00

c)   $3.00

d)   $4.00

35. The fixed-cost fallacy occurs when
    1. A firm considers irrelevant costs
    2. A firm ignores relevant costs
    3. A firm considers overhead or depreciation costs to make short-run decisions
    4. Both a and c

36. The hidden-cost fallacy occurs when
    1. A firm considers irrelevant costs
    2. A firm ignores relevant costs
    3. A firm considers overhead or depreciation costs to make short-run decisions
    4. Both a and c

37. When a firm ignores the opportunity cost of capital when making investment or shutdown decisions, this is a case of
    1. Fixed-cost fallacy
    2. Sunk-cost fallacy
    3. Hidden-cost fallacy
    4. None of the above

38. “Buy now, pay later” or “try it before you buy it” are examples of
    1. Loss aversion
    2. Endowment effect
    3. Confirmation bias
    4. Anchoring bias

39. All the following are examples of accounting costs, except
    1. Interest payments on borrowed funds
    2. Costs paid to suppliers for product ingredients
    3. Cost of equity
    4. Depreciation expenses related to investments in buildings and equipment

40. A firm wishes to fire an employee. The company will save up to $3000 per month on his compensation package. It is estimated that the employee contributes around $4,100 to the company. The firm
    1. Should not fire the employee because the benefits outweigh the costs
    2. Should fire the employee if the hidden cost of not firing him is $500
    3. Should fire the employee if the hidden cost of not firing him is $1500
    4. Need more information

41. In the long-run, all costs are
    1. Fixed costs
    2. Variable costs
    3. Sunk Costs
    4. Marginal Costs

42. All the following are examples of variable costs, except
    1. Labor costs
    2. Cost of raw materials
    3. Accounting fees
    4. Electricity costs

43. All of the following are examples of fixed costs, except
    1. Tax accountant fees
    2. Package designing fees
    3. Insurance
    4. Shipping costs

44. Total costs equal
    1. Fixed costs
    2. Variable costs
    3. Sunk costs
    4. Fixed plus variable costs

45. If a firm is earning negative economic profits, it implies
    1. That the firm’s accounting profits are zero
    2. That the firm’s accounting profits are positive
    3. That the firm’s accounting profits are negative
    4. More information is needed to conclude about accounting profits

46. If a firm is earning negative accounting profits, it implies
    1. That the firm’s economic profits are zero
    2. That the firm’s economic profits are positive