A business owner makes 1000 items a day

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Multiple Choice Questions

1. (2 pts) A business owner makes 1,000 items a day. Each day she contributes eight hours to produce those items. If hired elsewhere 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.

1.

2. (2 pts) A business owner makes 1,000 items a day. Each day he or she contributes eight hours to produce those items. If hired, elsewhere he or she could have earned $250 an hour. The item sells for $15 each. Production does not stop during week- ends. 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.

2.

3. (2 pts) If a firm is earning negative economic profits, it implies

A. that the firm’s accounting profits are zero.

B. that the firm’s accounting profits are positive.

C. that the firm’s accounting profits are negative.

D. that more information is needed to determine accounting profits.

3.

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4. (2 pts) Opportunity costs arise due to

A. resource scarcity.

B. interest rates.

C. limited wants.

D. unlimited scarcity.

4.

5. (2 pts) All the following are examples of variable costs, except

A. labor costs.

B. cost of raw materials.

C. accounting fees.

D. electricity cost.

5.

6. (2 pts) Microsoft found that instead of producing a DVD player and a gaming system separately, it is cheaper to incorporate DVD playing capabilities in its new version of the gaming system. Microsoft is taking advantage of

A. economies of scale.

B. learning curve.

C. economies of scope.

D. decreasing marginal costs.

6.

7. (2 pts) As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because

A. total fixed costs are decreasing as more clubs are produced.

B. average variable cost is decreasing as more clubs are produced.

C. there are scale economies.

D. total variable cost is decreasing as more clubs are produced.

7.

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8. (2 pts) Average costs curves initially fall

A. due to declining average fixed costs.

B. due to rising average fixed costs.

C. due to declining accounting costs.

D. due to rising marginal costs.

8.

9. (2 pts) A security system company’s total production costs depend on the number of systems produced according to the following equation: TC = $20, 000, 000+ $4, 000× Q. Given these data, which of the following is a FALSE statement?

A. There are economies of scale.

B. There are fixed costs associated with this business.

C. There are diseconomies of scale.

D. A firm that produces a larger output has a cost advantage over a smaller firm.

9.

10. (2 pts) A company faces the following costs at the respective production levels in ad- dition to its fixed costs of $50,000:

Quantity Marginal Cost Sale Price Marginal Return 1 $10,000 $20,000 $10,000 2 $11,000 $20,000 $9,000 3 $12,000 $20,000 $8,000 4 $13,000 $20,000 $7,000 5 $14,000 $20,000 $6,000

How would you describe the returns to scale for this company?

A. Increasing

B. Decreasing

C. Constant

D. Marginal

10.

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11. (2 pts) Once marginal cost rises above the average cost,

A. average costs will increase.

B. average costs are unaffected.

C. average costs will decrease.

D. None of the above.

11.

Note that these first MC’s come from Froeb chapters 3 and 7

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12. (2 pts) Consider the following for your one-person sandwich shop: your rent is $1,000/month; your materials (meat, cheese, bread, etc) cost $4/sandwich. Each month you sell about 1000 sandwiches. What are your monthly fixed costs from the information given?

A. $1,000

B. $1,004

C. $4,000

D. $5,000

12.

13. (2 pts) Consider the following for your one-person sandwich shop: your rent is $1,000/month; your materials (meat, cheese, bread, etc) cost $4/sandwich. Each month you sell about 1000 sandwiches. What are your monthly variable costs from the information given?

A. $1,000

B. $1,004

C. $4,000

D. $5,000

13.

14. (2 pts) At the current point in production, the cost to make one more pair of sun- glasses is larger than the average cost to make all the other ones. Thus, with respect to production decisions,

A. Average costs are rising.

B. Fixed costs are rising.

C. Total variable costs are falling.

D. None of the above.

14.

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15. (2 pts) The law of diminishing marginal productivity states that

A. As you expand output, your marginal productivity eventually increases

B. As you expand output, your marginal productivity eventually declines

C. As you expand output, the total product eventually increases

D. None of the above

15.

16. (2 pts) When a firm is experiencing increasing marginal costs, it implies

A. A constant marginal productivity

B. decreasing average costs

C. decreasing marginal productivity

D. increasing marginal productivity

16.

17. (2 pts) Diminishing marginal productivity can occur due to the following reason(s)

A. the difficulty of monitoring and motivating larger workforces

B. the increasing complexity of larger systems

C. the “fixity” or permanence of some factor of production

D. all of the above

17.

18. (2 pts) Bob the builder is in both the residential and commercial construction busi- ness in the Greater LA area. An established firm from Las Vegas decides to enter into the COMMERICAL construction business in LA. As a result, Bob’s prices have to fall. This price decrease:

A. increases the opportunity cost of building residential real estate.

B. reduces the opportunity cost of building residential real estate.

C. is an example of a price ceiling.

D. is an example of a price floor.

18.

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19. (2 pts) Bob the builder is in both the residential and commercial construction busi- ness in the Greater LA area. An established firm in L.A. decides to move to the Las Vegas market and thus exits the RESIDENTIAL construction business in LA. As a result, Bob’s prices can go up. This price increase:

A. reduces the opportunity cost of building commercial real estate.

B. increases the opportunity cost of building commercial real estate.

C. is an example of a price ceiling.

D. is an example of a price floor.

19.

"

20. (2 pts) If long run average costs are constant with respect to output, you have

A. Increasing returns to scale

B. Decreasing returns to scale

C. Constant returns to scale

D. None of the above

20.

"

21. (2 pts) What are economies of scale?

A. decreasing average costs as production increases

B. increasing average costs as production increases

C. increasing fixed costs as production increases

D. none of the above

21.

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22. (2 pts) What is a synergy or cost complementarity?

A. the cost of producing different products offered by separate companies would be more expensive when produced by one company

B. the cost of producing different products offered by separate companies is higher than when produced by one company

C. the cost of producing different products offered by separate companies is equal to when the products are produced by one company

D. None of the above

22.

23. (2 pts) A food company trying to increase its profits by expanding in to the soft drinks business is an example of

A. Economies of scale

B. Economies of Scope

C. Diseconomies of Scale

D. Diseconomies of Scope

23.

24. (2 pts) A food truck operator originally produced hamburgers and hotdogs. To serve the tastes of their various customers, the hot dog vendor decides to start producing turkey dogs and ham sandwiches as well. Since the new products were introduced, average costs rose dramatically. The vendor is experiencing

A. Economies of scale

B. Economies of scope

C. Diseconomies of scale

D. Diseconomies of scope

24.

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25. (2 pts) As firms get bigger, long-run average costs fall when returns to scale are:

A. increasing

B. decreasing

C. constant

D. 7

25.

26. (2 pts) Your firm just finished developing a new line of eyeglass frames, a process which took $2M of R&D. However, a month after you finished this development, a new team of experts approach you and say they can develop it for $1.5M. What do you do?

A. Nothing; it’s a sunk cost and cannot be recovered.

B. Hire the new team since they’re cheaper.

C. Exit the industry.

26.

27. (2 pts) Which of the following is a sunk cost when deciding to close down a business or not?

A. Monthly lease

B. Wages of temporary workers

C. Manager salaries

D. None of the above

27.

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Essay Questions

28. (5 points) Froeb IP 03.1 You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value). U2 has a concert the same night, and this represents your next-best alternative activity. Tickets to the U2 concert cost $80, and on any particular day, you would be willing to pay up to $100 to see this band. Assume that there are no additional costs of seeing either show. Based on the information presented here, what is the opportunity cost of seeing Bruce Springsteen?

29. (5 points) Froeb IP 03.4 The expression “3/10, net 45” means that the customers receive a 3% discount if they pay within 10 days; otherwise, they must pay in full within 45 days. What would the seller’s cost of capital have to be in order for the discount to be cost justified? (Hint: Opportunity Cost)

30. (5 points) Froeb IP 03.7 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, calculate the following:

1. Total variable costs 2. Total fixed costs 3. Total costs

31. (5 points) Froeb IP 07.2 Suppose Nike’s managers were considering expanding into producing sports bever- ages. Why might the company decide to do this under the Nike brand name?

32. (5 points) Froeb IP 07.5 Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your costs decrease by $6. The first unit costs you $64 to produce. If you receive a request for proposal (RFP) on a project for four units, what is your break-even price? Suppose that if you get the contract, you estimate that you can win another project for two more units. Now what is your break-even price for those two units?

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33. (5 points) Froeb IP 07.6 A multiconcept restaurant incorporates two or more restaurants, typically chains, under one roof. Sharing facilities reduces costs of both real estate and labor. The multiconcept restaurants typically offer a limited menu, compared with full-sized, stand-alone restaurants. For example, KMAC operates a combination Kentucky Fried Chicken (KFC)/Taco Bell restaurant. The food preparation areas are separate, but or- ders are taken at shared point-of-sale (POS) stations. If Taco Bell and KFC share facil- ities, they reduce fixed costs by 30%; however, sales in joint facilities are 20% lower than sales in two separate facilities. What do these numbers imply for the decision of when to open a shared facility versus two separate facilities?

34. (60 points) Froeb the rest Try the rest of Froeb Ch 3 and 7 problems

35. (5 points) Sunk Costs Friendly Fones recently introduced a new smart-phone. Friendly invested $100 mil- lion in equipment for the new design mold (the mold is malleable and can be sold for $20 million to be used on another project) and $10 million in a new microchip used specifically for the phone (not valuable to anyone else). Labor and the cost of materi- als necessary to make each phone is about $75. What, if anything, can the firm view as a sunk cost? Fully explain your answer.

36. (5 points) Lawyer A lawyer is contemplating quitting her current job with a major corporation (where she earns an annual salary of $110,000) to open her own law practice. She estimates that the total cost of operating the office will be approximately $118,000 per year and the potential revenue is estimated as $220,000 per year. What should she do? Justify your answer.

37. (15 points) Sam Baker Please complete the tutorial available at http://sambaker.com/econ/, titled Total Cost, Variable Cost, and Average Cost. A simple statement saying you did it is suffi- cient.

http://sambaker.com/econ/