Clayton State University

ECON 6100

1)Variable costs are

1. a.costs that vary with output
   1. not important in decision making
   2. costs that do not vary with output
   3. equal to total costs

2. A business incurs the following costs per unit: Labor $125/unit; Materials $45/unit and rent

$250,000/month. If the firm produces 1,000,000 units a month, the total variable costs equal

1. 1. $125Million
   2. $45Million
   3. $1Million
   4. $170Million

3. A business incurs the following costs per unit: Labor $125/unit; Materials $45/unit and rent

$250,000/month. If the firm produces 1,000,000 units a month, the total fixed costs equal

a. $250,000

b. $50,000

c. $20,500

d. $30,000

4. A business incurs the following costs per unit: Labor $125/unit; Materials $45/unit and rent

$250,000/month. If the firm produces 1,000,000 units a month, the total costs equal

a. $125,250,000

b. $170,250,000

c. $125,050,000

d. $170,050,000

5. Firm X is producing 1000 units, selling them at $15 each. Variable costs are $3 per unit and the firm is making an accounting profit of $3000. What is the firm’s fixed costs?

a. $9,000

b. $10,000

c. $11,000

d. $12,000

6. Firm X is producing 1000 units, selling them at $15 each. Variable costs are $3 per unit and the firm is making an accounting profit of $3000. What is the firm’s total variable costs?

a. $1000

b. $3000

c. $5,000

d. $7,000

7. Firm X is producing 1000 units, selling them at $15 each. Variable costs are $3 per unit and the firm is making an accounting profit of $3000. What is the firm’s total costs?

a. $10,000

b. $11,000

c. $12,000

d. $13,000

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

9. In the short-run:
   1. All inputs are variable
   2. Some inputs are fixed and some inputs are variable
   3. There are no fixed inputs
   4. The firm is not restricted in how much it can produce

10. 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

11. 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

12. 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

13. A company currently sells 10,000 units at $9/unit and makes $20,000 accounting profit. Variable costs currently stand at $6 per unit. What are the company’s fixed costs?

a. $5,000

b. $10,000

c. $15,000

d. The company has no fixed costs

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

15. For a restaurant, all the following are examples of variable costs, except
    1. Labor costs
    2. Cost of raw materials
    3. Rents on dining space
    4. None- all of them are variable costs

16. For a restaurant, all the following are fixed costs, except
    1. Space rental
    2. Advertising
    3. Raw material cost
    4. All of the above-they are all variable costs

17. For a trucking company, all of the following are examples of fixed costs, except
    1. Tax accountant fees
    2. Package designing fees
    3. Insurance
    4. Gasoline costs

18. For a moving company, all of the following are examples of variable costs, except
    1. Gasoline costs
    2. Truck rents
    3. Marketing costs
    4. None of the above

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

20. Jane makes 1000 items a day. Each day she spends 8 hours producing those items. If hired elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her accounting profit?

a. $300,000

b. $60,000

c. $450,000

d. $240,000

21. A business owner makes 1000 items a day. Each day she spends 8 hours producing those items. If hired, elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her economic profit?

a. $300,000

b. $60,000

c. $450,000

d. $240,000

22. 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. What is his accounting profit?

a. $320,000

b. $70,000

c. $282,500

d. $32,500

23. Scott used $4,000,000 from his savings account that paid an annual interest of 5% to purchase a hardware store. After one year, Scott sold the business for $4,100,000. His accounting profits is:

a. $300,000

b. $100,000

c. $80,000

d. $20,000

24. Scott used $4,000,000 from his savings account that paid an annual interest of 5% and a $60,000 loan at an annual interest rate of 5% to purchase a hardware store. After one year, Scott sold the business for $4,100,000. His accounting profits is:

a. $300,000

b. $100,000

c. $97,000

d. $20,000

25. Scott used $4,000,000 from his savings account that paid an annual interest of 5% and a $60,000 loan at an annual interest rate of 5% to purchase a hardware store. After one year, Scott sold the business for $4,100,000. His economic profits is:

a. $300,000

b. $100,000

c. $97000

d. None. He runs an economic loss of $103,000

26. Scott used $4,000,000 from his savings account that paid an annual interest of 5% to purchase a hardware store. After one year, Scott sold the business for $4,100,000. His economic profits is:

a. $300,000

b. $100,000

c. -$100,000

d. -$200,000

27. 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. What is his economic profit?

a. $320,000

b. $70,000

c. $282,500

d. $32,500

28. Which of the following statements is true?
    1. Economic profits ignore implicit costs.
    2. Economic profits include implicit costs.
    3. Accounting profits include all of the opportunity costs.
    4. Economists consider sunk costs in their decision making.

29. Accountants and Economists differ in their calculations of profits in that;
    1. economists consider sunk costs
    2. accountants consider implicit costs only
    3. accountants consider explicit costs only
    4. all of the above

30. A business owner makes 50 items a day. He spends 8 hours in producing those items. If hired elsewhere he could have earned $10 an hour. The item sells for $10 each. Production occurs seven days a week. If the explicit costs total $10,000 a month, the accounting profit for the month equals:

a. $1,760

b. $2,240

c. $11,760

d. $5,000

31. A business owner makes 50 items a day. She spends 8 hours in producing those items. If hired elsewhere she could have earned $10 an hour. The item sells for $10 each. Production occurs seven days a week. If the explicit costs total $10,000 a month the economic profit for the month equals:

a. $2,600

b. $2,240

c. $11,760

d. $5,000

32. 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 accounting profit is:

a. $300,000

b. $100,000

c. $80,000

d. $20,000

33. 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 economic profit is:

a. $300,000

b. $100,000

c. $80,000

d. $20,000

34. Jim is planning on attending a football game. He spent $40 on the ticket. He will have to take the day off 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. $60

d. $140

35. Jim is planning on attending a football game. He paid $40 for the ticket. He will have to take the day off 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 accounting (out of pocket) cost of attending the game equals

a. $80

b. $40

c. $60

d. $140

36. A manager invests $400,000 in a technology that should reduce the 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

37. A manager invests $400,000 in a technology that should reduce the overall costs of production. The

company managed to reduce their cost per unit from $2 to $1.85. All else equal, if the firm continues its production in the same economic environment, the firms accounting profits should

1. 1. increase
   2. decrease
   3. stay the same
   4. does not affect profits

38. A manager invests $400,000 in a technology that should reduce the overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. All else equal, if the firm continues its production in the same economic environment, the firm’s economic profits should
    1. increase if output is low enough
    2. decrease
    3. stay the same
    4. increase if output is high enough

39. All of the following costs are included in the calculation of accounting profit, except
    1. Interest payments on borrowed funds
    2. Costs paid to suppliers for product ingredients
    3. Opportunity cost of capital
    4. Depreciation expenses related to investments in buildings and equipment

40. If a firm is earning negative economic profits, it implies
    1. That the firm’s accounting profits are necessarily zero
    2. That the firm’s accounting profits are necessarily positive
    3. That the firm’s accounting profits are necessarily negative
    4. Economic profits alone cannot determine accounting profits

41. If a firm is earning negative accounting profits, it implies
    1. That the firm’s economic profits are necessarily zero
    2. That the firm’s economic profits are necessarily positive
    3. That the firm’s economic profits are necessarily negative
    4. Accounting profits alone cannot determine economic profits

42. You and two partners start a company. However, your partners play no role in running the company. You spend all your time managing the business. The time that you could have spent working for someone else and earning wages instead of running the business is your:

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

43. 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 cost of the next best alternative forgone
    4. is the total cost of an action

44. Economists argue that:
    1. accounting costs include all types of costs, even implicit costs.
    2. every decision has an opportunity cost.
    3. some decisions have opportunity costs, while others don’t.
    4. economic decisions should include sunk costs.

45. Opportunity cost of an activity
    1. Is included in accounting costs
    2. Does not include monetary costs
    3. May include both monetary costs and foregone incomes
    4. Is known with certainty

46. After graduating from college, Jim had two choices. He can either move to Florida, from Philadelphia, where he can work as an analyst and earn $60,000 or he can stay in Philadelphia and work in a car dealership earning $59,000. His opportunity cost of moving to Florida includes
    1. The benefits he could have received from playing soccer

b. $59,000

c. both a and b

d. none of the above

47. A car dealership union negotiates a contract that dramatically increases all salesmen’s 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. of becoming a hardware salesman would decrease
    3. of becoming a hardware salesman would increase

1. 4. none of the above

48. Wealthy professors are more likely to shop at high end stores with shorter wait times at the cashier than poor students because
    1. They value the item more than the student
    2. They like wasting money
    3. The opportunity cost of waiting in a cashier line is higher for professors than for undergraduate students
    4. They like to show off

49. Lucy can bake 200 cookies in an hour or watch her favorite tv show. If she chooses to watch her show, the cookies are an example of
    1. Unlimited resources
    2. Limited wants
    3. Opportunity cost
    4. None of the above

50. You are at an all-you-can-eat-buffet. You feel almost full. However they just brought out your favorite dessert and you can either choose to eat that or a helping of tapioca pudding. If you choose the cupcakes, the pudding would be your
    1. Opportunity cost
    2. Variable cost
    3. Fixed cost
    4. Sunk cost

51. You are at a restaurant deciding if you would like some dessert after the meal. The dinner is over so you do not want anything else but the dessert. The opportunity cost of getting the dessert would include
    1. Nothing, because you are already there
    2. Another round of appetizers possibly
    3. Anything else you could buy
    4. None of the above

52. You go to see a movie that you believe would turn out to be amazing. The ticket costs you $20. Once in the theatre you realize that the movie is awful. If you leave now, you can still catch your favorite TV show. What should you do?
    1. Stay and watch the movie since you paid $20 for it

1. 2. The ticket price is now a sunk cost, you can ignore it and go home
   3. Stay and watch the movie since the opportunity cost of the movie is zero
   4. None of the above

53. Sarah 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

54. People tend to eat more at all you can eat buffets than they would at any other restaurants. This is so because the cost of consuming an additional item at an all you can eat buffet is
    1. negative
    2. zero
    3. positive
    4. None of the above

55. A firm wishes to shut down an office and fire 100 employees. The company will save $3000 per month per employee. It is estimated that each employee contributes $4,100 to the company. The firm rents office space for this group of employees at $1500. What should the company do?
    1. Fire the employees and save $1500 on rent
    2. Not fire the employees keeping them generates a profit of $1100 per employee
    3. Not fire the employees since keeping them generates a profit of $1085 per employee
    4. None of the above

56. A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85. Later, a manager has an opportunity to outsource production to another company at a cost per unit of $1.75. If you are the manager, you
    1. should consider the $400,000 as a sunk cost, not relevant to the decision.
    2. should reduce his effort by ignoring any new developments and letting the production run as it is.
    3. should ignore the $400,000 fixed cost.
    4. Both A & C

57. A manager invests $20,000 in equipment that would help the company reduce it’s per unit costs from $15 to

$12. He expects the equipment to be in use for the next seven years. After two years, he realizes that if he

outsourced the production, the unit cost would be $7 instead. At this point what should the senior manager do?

1. 1. Charge the manager for the next five years of depreciation
   2. Write off the equipment as sunk cost and allow for outsourcing since it is cheaper
   3. Not allow for outsourcing since the equipment is good for another five years
   4. None of the above

58. A manager invests $400,000 in a technology that should reduce the overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. After the investment has been made, the

$400,000 investment is

1. 1. Considered sunk costs, not relevant in further decision making
   2. Considered sunk costs, but still relevant in further decision making
   3. Considered a loss
   4. Considered a profit

59. The fixed-cost fallacy occurs when
    1. A firm considers sunk costs in making decisions
    2. A firm ignores relevant costs
    3. A firm considers overhead or depreciation costs in making decisions
    4. Both a and c

60. A hidden cost fallacy can be avoided
    1. by ignoring the opportunity costs to using a capital
    2. by ignoring the cost of capital
    3. by taking all capital costs into account including the cost of equity
    4. none of the above

61. 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

62. 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