Glenn L.

Veluz
BSA-1A

Chapter 2 Multiple Choices

1. An individual’s value for a good or service is the

a. the amount of money he or she used to pay for a good.
b. the amount of money he or she is willing to pay for it.
c. the amount of money he or she has to spend on goods.
d. none of the above.

2. The biggest advantage of capitalism is that

a. It generates equality.
b. Prices assist in moving assets from high- value to low-value uses.
c. It is fair.
d. It creates wealth by letting a person follow his or her own self-interest.

3. Wealth-creating transactions are more likely to occur

a. With private property rights.
b. With strong contract enforcement.
c. With black markets.
d. All of the above.

4. Government regulation
a. provides incentives to conduct business in an illegal black market.
b. plays no role in generating wealth.
c. is the best way to eliminate poverty.
d. does not enforce property rights.

5. An example of a price floor is

a. minimum wages.
b. rent controls in New York.
c. Both a and b
d. None of the above

6. A price ceiling
a. is a government-set maximum price.
b. is an implicit tax on producers and an implicit subsidy to consumers.
c. will create a surplus.
d. causes an increase in consumer and producer surplus.

7. Taxes:
a. Impede the movement of assets to higher- valued uses.
b. reduce incentives to work.
c. decreases the number of wealth creating transactions.
d. All the above

8. A consumer values a car at $30,000 and it costs a producer $20,000 to make the same car. If the transaction is
completed at $24,000, the transaction will generate:
a. no surplus.
b. $4,000 worth of seller surplus and unknown amount of buyer surplus.
c. $6,000 worth of buyer surplus and $4,000 of seller surplus.
d. $6,000 worth of buyer surplus and unknown amount of seller surplus.

9. A consumer values a car at $525,000 and a producer values the same car at $485,000. If sales tax is 8% and is levied on
the seller, then the seller’s bottom line price is
a. $527,000.
b. $523,800.
c. $525,000.
d. $500,000.

10. Efficiency implies opportunity,

a. Always.
b. Never.
c. Only if accompanied by secure property rights.
d. None of the above.

Chapter 2 Individual Problems

2-1 Airline Delays

How will commercial airlines respond to the threat of new $27,500 fines for keeping passengers on the tramac for more
than 3 hours? What inefficiency will this create?

2-2 Selling Used Cars

I recently sold my used car. If no new production occurred for this transaction, how could it have created value?

2-3 Flood Insurance

The U.S. government subsidizes flood insurance because those who want to buy it live in the flood plain and cannot get it
at reasonable rates. What inefficiency does this create?

2-4 Goal Alignment among Physicians

An elderly physician has built up his own practice into a quite valuable business. Now that he is thinking of retiring, he
wants to take on a partner to learn the business and eventually buy the practice in three years. Her compensation will be
a salary plus 25% of the profits if they are below the historical average and 50% for any increase above the historical
average. The eventual purchase price for the practice will be 5 times the average profits over the three years. Discuss the
efficiency aspects of such a contract. Are the incentives of the buyer and seller aligned?

2-5 Kraft and Cadbury

When Kraft recently bid $16.7 billion for Cad- bury, Cadbury’s market value rose, but Kraft’s market value fell by more.
What does this tell you about the value-creating potential of the deal?

2-6 Price of Breast Reconstruction vs. Breast Augmentation

Two similar surgeries, breast reconstruction and breast augmentation have different prices. Breast augmentation is cosmetic
surgery not covered by health insurance. Patients who want the surgery must pay for it themselves. Breast reconstruction
following breast removal due to cancer is covered by insurance. The price for one of the surgeries has in- creased by about
10% each year since 1995 while the other has increased by only 2% per year. Which of the surgeries has the lower inflation
rate? Why?

Chapter 3 Multiple Choices

1. 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
weekends. If the explicit costs total $150,000 for 30 days, the firm’s ac- counting profit for the month equals
a. $300,000.
b. $60,000.
c. $450,000.
d. $240,000.

2. 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
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.

3. 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.

4. Opportunity costs arise due to

a. resource scarcity.
b. interest rates.
c. limited wants.
d. unlimited scarcity.
5. 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
a. the benefits he could have received from playing soccer.
b. the income he could have earned at the car dealership.
c. Both a and b
d. Cannot be determined from the given information

6. Economic Value Added helps firms to avoid the hidden-cost fallacy

a. by ignoring the opportunity costs to using capital.
b. by differentiating between sunk and fixed costs.
c. by taking all capital costs into account including the cost of equity.
d. None of the above

7. The fixed-cost fallacy occurs when

a. a firm considers irrelevant costs.
b. a firm ignores relevant costs.
c. a firm considers overhead or depreciation costs to make short-run decisions.
d. Both a and c

8. Mr. D’s Barbeque of Pickwick, TN produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D’s fixed costs are
$50,000. The average variable cost per slab is a constant
$2. The average total cost per slab then is
a. $7.
b. $2.
c. $5.
d. Impossible to determine

9. All the following are examples of variable costs, except

a. labor costs.
b. cost of raw materials.
c. accounting fees.
d. electricity cost.

10. The U.S. government bought 112,000 acres of land in south-eastern Colorado in 1968 for $17,500,000. The cost of
using this land to- day exclusively for the reintroduction of the black-tailed prairie dog
a. is zero, because they already own the land.
b. is zero, because the land represents a sunk cost.
c. is equal to the market value of the land.
d. is equal to the total dollar value the land would yield if used for farming and ranching.

Chapter 3 Individual Problems

3-1 Concert Opportunity Cost

You won a free ticket to see a Bruce Springs- teen 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?

3.2 Concert Opportunity Cost 2

You were able to purchase two tickets to an up- coming concert for $100 apiece when the concert was first announced
three months ago. Recently, you saw that StubHub was listing similar seats for $225 apiece. What does it cost you to
attend the concert?

3-3 Housing Bubble

Due to the housing bubble, many houses are now selling for much less than their selling price just two to three years ago.
There is evidence that homeowners with virtually identical houses tend to ask for more if they paid more for the house. What
fallacy are they making?
3-4 Opportunity Cost
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)

3-5 Starbucks
Starbucks is hoping to make use of its excess restaurant capacity in the evenings by experimenting with selling beer and
wine. It speculates that the only additional costs are hiring more of the same sort of workers to cover the additional hours
and costs of the new line of beverages. What hidden costs might emerge?

3-6 Dropping University Courses

Students doing poorly in courses often consider dropping the courses. Many universities will only offer a refund up to a
certain date. Should this affect their drop decisions?

Chapter 4 Multiple Choices

1. When economists speak of “marginal,” they mean

a. opportunity.
b. scarcity.
c. incremental.
d. unimportant.

2. Managers undertake an investment only if

a. marginal benefits of the investment are greater than zero.
b. marginal costs of the investment are greater than marginal benefits of the investment.
c. marginal benefits are greater than marginal costs.
d. investment decisions do not depend on marginal analysis.

3. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw
materials are ordered weekly, and they cost $10 for every unit produced. The weekly cost of the rent payment for the
factory is $2,250. How do the overall costs break down?
a. Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250.
b. Total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250.
c. Total variable cost is $5,000; total fixed cost is $14,250; total cost is $19,250.
d. Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250.

4. Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. Which of the following is
true if marginal cost is constant?
a. FC = $100
b. FC = $200
c. FC = $300
d. FC = $400

5. A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The
manager would compare
a. the total benefits gained from the two factories to the total costs of running the two factories.
b. the incremental benefit expected from the second factory to the total costs of running the two factories.
c. the incremental benefit expected from the second factory to the cost of the second factory.
d. the total benefits gained from the two factories to the incremental costs of running the two factories.

6. A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity
by 100 units a week. The cost of hiring him or her is $1,500 per week. If the price of each unit is $12,
a. the MR of hiring the worker is $1,500.
b. the MC of hiring the worker is $1,200.
c. the firm should not hire the worker since MB < MC.
d. All the above

7. A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of $7 per
hour is sufficient. What is the marginal cost of the 13th worker?
a. $117
b. $9
c. $33
d. $84

8. If a firm’s average cost is rising, then

a. marginal cost is less than average cost.
b. marginal cost is rising.
c. marginal cost is greater than average cost.
d. the firm is making an economic profit.

9. After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you
of committing the sunk-cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough
sale. Which of the following suggests the sales representative may be right?
a. Most of the costs of drug development are sunk, not fixed.
b. Sales representatives are paid a sales commission on revenue, so they don’t care about the costs of drug development.
c. Sales representatives don’t worry that a low price today may make it more difficult for the company’s other sales
representatives to charge higher prices to their customers, tomorrow.
d. Sales representatives think only about one thing, sales.

10. A company is producing 15,000 units. At this output level, marginal revenue is $22, and the marginal cost is $18. The
firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?
a. The company is making a loss.
b. The company needs to cut production.
c. The company needs to increase production.
d. Not enough information is provided.

Chapter 4 Individual Problems

4-1 Extent versus Discrete Problems

Identify which of the following are extent decisions.
a. Decide whether to expand an existing product into a new region.
b. What discount should be given on pro- ducts during the upcoming holiday sale?
c. Should the advertising budget be changed for the upcoming year?
d. Should you develop a new product for an existing product line?

4-2 Game Day Shuttle Service

You run a game day shuttle service for parking services for the local ball club. Your costs for different customer loads are
1: $30, 2: $32, 3: $35, 4: $38, 5: $42, 6: $48, 7: $57, and 8: $68. What are your marginal costs for each customer load
level? If you are compensated $10 per ride, what customer load would you want?

4-3 Paid for Grades

Children in poor neighborhoods have bleak out- looks on life and do not see much gain to studying. A recent experiment
is paying children in poor neighborhoods $100 for each “A” they earn in a six-week grade reporting cycle. How does this
affect behavior?

4-4 Supplier Bids

Your company is contemplating bidding on an RFP (Request For Proposal) for 100,000 units of a specialized part. Why
might the amount be more than the requesting company actually wants?

4-5 Processing Insurance Claims

Your insurance firm processes claims through its newer, larger high-tech facility and its older, smaller low-tech facility.
Each month, the high-tech facility handles 10,000 claims, incurs $100,000 in fixed costs and $100,000 in variable costs.
Each month, the low-tech facility handles 2,000 claims, incurs $16,000 in fixed costs and $24,000 in variable costs. If
you anticipate a de- crease in the number of claims, where will you lay off workers?

4-6 Copier Company

A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the
firm added two copiers, and output increased by 100,000 pages per day. One month ago, they added five workers, and
productivity also increased by 50,000 pages per day. Copiers cost about twice as much as workers. Would you recommend
they hire another employee or buy another copier?
Chapter 5 Multiple Choices

1. Which of the following will increase the breakeven quantity?

a. A decrease in overall fixed costs
b. A decrease in the marginal costs
c. A decrease in the price level
d. An increase in price level

2. The higher the interest rates

a. the more value individuals place on future dollars.
b. the more value individuals place on cur- rent dollars.
c. the fewer investments will take place.
d. Does not affect the investment strategy

3. Assume a firm has the following cost and revenue characteristics at its current level of output: price = $10.00, average
variable cost = $8.00, and average fixed cost = $4.00. This firm is
a. incurring a loss of $2.00 per unit and should shut down.
b. realizing only a normal profit.
c. realizing an economic profit of $2.00 per unit.
d. incurring a loss per unit of $2.00, but should continue to operate in the short run.

4. Sarah’s Machinery Company is deciding to dump their current technology A for a new technology B with small
fixed costs but big marginal costs. The current technology has fixed costs of $500 and marginal costs of $50 whereas
the new technology has fixed costs of $250 and marginal costs of $100. At what quantity is Sarah Machinery
indifferent between two technologies?
a. 5
b. 6
c. 7
d. 8

5. What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first
year and $80 at the end of the second year? Assume a discount rate of 10%.
a. $10.52
b. $11.57
c. $18.18
d. $30.00

6. You expect to sell 500 cell phones a month, which have a marginal cost of $50. If your fixed costs are $5,000 per
month, what is the breakeven price?
a. $10
b. $50
c. $60
d. $100

7. You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will
cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce a
board. If you can sell dartboards for $100 each, what is your breakeven quantity?
a. 1,000
b. 3,500
c. 4,375
d. 17,500

8. Which of the following is NOT true if a firm shuts down and produces zero output in the short run?
a. Variable costs will be zero.
b. Losses will be incurred.
c. Fixed costs will be greater than zero.
d. Fixed costs will be less than zero.

9. What are some of the solutions for a hold-up problem?

a. Mergers
b. Contracts
c. Exchange of “hostages”
d. All the above
10. Which of the following is classified as a sunk cost?
a. Cost of the next-best alternative
b. Additional cost of producing an additional unit
c. Research costs to determine the implementation of a technology
d. Total cost of producing a product

Chapter 5 Individual Problems

5-1 George’s T-shirt Shop

George’s T-Shirt Shop produces 5,000 custom- printed T-shirts per month. George’s fixed costs are $15,000 per month.
The marginal cost per T-shirt is a constant $4. What is his breakeven price? What would be George’s breakeven price if
George were to sell 50% more shirts?

5-2 Net Present Value

Suppose an initial investment of $100 will return $50/year for three years (assume the $50 is received each year at the end
of the year). Is this a profitable investment if the discount rate is 20%?

5-3 Doctor’s Human Capital

Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to
practice medicine. Doctors are willing to make large investments in their human capital because they expect to be
compensated for doing so when they begin work. In Canada, the government nationalized the health- care system and
reduced doctors’ compensation. Is this a form of post-investment hold-up?

5-4 Solar Panel Installation

A university spent $1.8 million to install solar panels atop a parking garage. These panels will have a capacity of 500 kw,
have a life expectancy of 20 years and suppose the discount rate is 10%.
a. If electricity can be purchased for costs of $0.10 per kwh, how many hours per year will the solar panels have to
operate to make this project break even?
b. If efficient systems operate for 2,400 hours per year, would the project break even?
c. The university is seeking a grant to cover capital costs. How big of a grant would make this project worthwhile (to the
university)?

5-5 Toy Trucks

Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for
a plastic injection molding machine (which can be sold for $2.0 million) and $100,000 in plastic injection molds
specifically for the toy (not valuable to anyone else). Labor and the cost of materials necessary to make each truck is about
$3. This year, a competitor has developed a similar toy that has significantly reduced demand for the toy truck. Now, the
original manufacturer is deciding whether they should continue production of the toy truck. If the estimated demand is
100,000 trucks, what is the breakeven price for the toy truck? Should you shut down?

5-6 Running a Hotel During a Recession

In early 2008, you purchased and remodeled a 120- room hotel to handle the increased number of conventions coming to
town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you
will only be able to sell 20,000 room-nights that cost on average $50 per room per night to service. You spent $20 million on
the hotel in 2008, and your cost of capital is 10%. The current going price to sell the hotel is $15million. What is your
breakeven price?