BE 301 - Midterm 1

If the firm hires 8 workers, the total amount of fixed costs equals

$1000

If you are willing to sell your lawn mower business for $355,000 and someone offers you $420,000 for it, this transaction will generate:

$65,000 worth of seller surplus and unknown amount of buyer surplus

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:

$70,000

Economists argue that:

there is an opportunity cost associated with all decisions

Buy now, pay later or try it before you buy it are examples of

endowment effect

In the short-run, a firm's decision to shut-down should not include

fixed costs

A firm experiencing constant economies of scale will have a long-run average cost curve that is:

horizontal

When economists speak of marginal, they mean

incremental

Marginal cost is the ______ cost of producing one additional unit and marginal revenue is the ______ revenue of selling an additional unit.

incremental, incremental

The opportunity cost of an action:

is equal to the value of the next best alternative

Marginal cost

is the additional cost incurred by producing and selling one more unit

Economists argue that subsidies lead to inefficient outcomes because

lead to too many transactions because the costs appear too low

Price ceilings cause

some suppliers to drop out of the market as they cannot charge the price they were earlier charging, a reduction in the quality of the product, the creation of black markets

If hiring the 4th worker increases total product by 50 units and the price of each unit is $15,

the firm should hire the 4th worker as MB>MC

In general, the large the price elasticity:

the larger the responsiveness of quantity to changes in price

The lower the interest rates

the less value individuals place on future dollars

In general, the smaller the price elasticity:

the smaller the responsiveness of quantity to changes in price

A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will not take place if

the tax is larger than the total surplus

Which of the following statements is true?

Although implicit costs do not show up in accounting profits, they nevertheless affect managerial decisions.

The break-even quantity is

Fixed Costs/(Price - Marginal Costs)

Jim recently graduated from college. His income increased tremendously from earning $5000 a year to $60,000 a year. Jim decided that instead of renting he will buy a house. This implies that

Houses are normal goods for Jim

Price gouging

Is an act of charging a high price to take advantage of shortages created by natural disasters

The biggest advantage of capitalism is that

It creates wealth by letting a person follow his or her own self-interest

A demand for a product is more inelastic a. when it has many close substitutes b. in the long-run c. when it has many complements d. none of the above

none of the above

If you are willing to purchase a house for $500,000 and you purchase the house for $500,000, this transaction will generate:

$0 worth of buyer surplus and unknown amount of seller surplus

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

$140

A consumer values a car at $525,000 and a producer values the same car at $485,000. If the transaction is completed at $510,000, the transaction will generate:

$15,000 worth of buyer surplus and $25,000 of seller surplus

Jim's burger produces 500 burgers per week. Each burger is priced at $3. What is the marginal revenue of selling the 50th burger

$3

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:

$32,500

A consumer values a car at $525,000 and a producer values the same car at $485,000. What is the highest dollar value of a tax that could be imposed on this exchange and the buyer and seller agree to the transaction?

$40,000

The marginal cost of hiring the 7th worker is

$400

Suppose you work for a firm that sells butter. The firm has conducted market research and found that the income elasticity of demand for butter is +0.5. What change in the quantity of butter demanded would we forecast if there is a 5% increase in the income of the firm's customers?

2.5%

What is the level of profits when four units are produced?

20

What is the marginal revenue of producing the fourth unit?

40

What is the marginal cost of producing the third unit

70

In the long-run:

All cost are variable

If your income goes up by 2% and, in response, the quantity demanded of good X falls by 3%, the good X can be considered

An inferior good

Once marginal cost rises above the average cost

Average costs will increase

If the income elasticity of demand of houses is exactly 1.40. Due to a recession, you expect incomes to drop by 25% next year. How will consumers adjust their purchase for houses?

Buy 35% less houses

A firm sells 1000 units per week. It charges $15 per unit, the average variable costs are $10, and the average costs are $25. The firm should

Continue operating as the firm is covering all the variable costs and some of the fixed costs

In production and cost structures, learning curves are associated with which of the following?

Decreasing average costs

Assume Coke and Pepsi are substitutes. Holding other things constant, if the price of Coke increases

Demand for Pepsi increases

A food company trying to increase its profits by expanding in to the soft drinks business is an example of

Economies of scope

Some critics of capitalism argue that

If once person makes money, someone else must be losing it

Managers should undertake an investment only if

Marginal benefits are greater than marginal costs

The level of an economic activity should be increased to the point where

Marginal costs are equal to marginal benefits

Opportunity cost of an activity

May include both monetary costs and foregone incomes

Which of the following would be classified as a sunk cost?

Research costs to determine the implementation of a technology

In the short-run:

Some costs are fixed and some costs are variable

Managers should choose to invest in a project if:

The NPV of the project is greater than zero

An individual's value for a good or service is the

The amount of money he or she is willing to pay for it

An owner of local salon realized that by decreasing the prices for haircuts, his revenue increased. This implies that

The demand for haircuts is elastic

As table manufacturing company produces more tables, the average total cost of each table produced increases. This is because

There is diseconomies of scale

Break-even quantity is a point where

There is neither a profit nor a loss

Which of the following are true? a. If production exhibits diseconomies of scope, firm should pair down production lines to reduce costs. b. If production exhibits diseconomies of scope, firm should pair up production lines to reduce costs. c. If production exhibits economies of scope, firm should pair up production lines to reduce costs. d. If production exhibits economies of scope, firm should pair down production lines to increase costs.

a & c

Suppose a friend asks to borrow $1200 to start a new business. They offer to pay you $1500 in 5 years. Suppose your personal discount rate is 5%. a. What is the future value of $1200 in 5 years' time? b. What is the present value of $1500 that you receive 5 years from now? c. What is the net present value of this investment?

a. $1,531.54 b.$1,175.29 c. -$24.71

Consider a firm that produces 500,000 units per year. The firm's fixed costs are $100,000, marginal costs are $250 and the price per unit is $400. a. In the short run, how low can the price of the good go before it's profitable to shut down? b. In the long run, how low can the price of the good go before it's profitable to shut down?

a. $250 b. $250.2

A firm's fixed costs are $5000. The firm charges $12 for each unit. For every additional unit the firm produces, it costs the firm $8. a. What is the firm's contribution margin? b. What is the firm's break even quantity?

a. $4 b.$1250

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. a. What is the value of variable cost? b. What is the value of fixed cost? c. What is the value of total cost?

a. $8,000 b. $5,000 c. $13,000

A manufacturing firm is deciding whether to invest in a new printer that needs an initial investment of $150,000. This will increase cash flows in the first year by $80,000 and $75,000 in the second year. a. If the interest rate is 10%, what is the net present value of this investment? b. If the interest rate is 1%, what is the new net present value of this investment?

a. -$15,289.26 b. $2,730.12

Consider the demand for some good. If the price of the good is $7 then the firm sells 1000 units. If the price of the good falls to $5 then the firm sells 1300 units. a. What is the percentage change in quantity for this scenario? b. What is the percentage change in price for this scenario? c. What is the elasticity of demand for this good? d. How would we classify the elasticity of demand for this good?

a. 26.09% b. -33.33% c. -0.78 d. inelastic

You own and operate a delivery service around campus. Your total costs depend on the number of deliveries you make. The relationship between deliveries and costs are depicted in the table below. Suppose you are paid $10 per delivery. Deliveries 1 2 3 4 5 6 7 8 Cost $30 $32 $35 $38 $42 $48 $57 $68 a. How many deliveries should you make to maximize profits? b. How much profit will you make?

a. 7 b. $13

A person is considering opening up a biscuit stand called Sunrise Biscuits (i.e., a drive-through/walkup breakfast shop) near campus. There are a series of costs associated with opening and operating the biscuit stand. The bullets below provide a short breakdown of each cost. Note: you are unable to break your leases and are alocked into those payments for a full year. Year-long lease on the building with per month payments: $1000/month Year-long lease on equipment with per month payments: $500/month Cost of ingredients per biscuit: $0.50/biscuit Labor costs per biscuit: $1.00/biscuit You decide to open and operate your biscuit stand, you find that the market price of biscuits is $3 and you are able to sell 900 a month. a. Should you stay open in the short run? b. Should you stay open in the long run?

a. yes b. no

Total cost divided by the total number of outputs is called:

average cost

One lesson of business:

buy low-valued assets and sell it to someone who values it higher.

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

by taking all capital costs into account including the cost of equity

Variable costs are

costs that vary with output

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

economic profits and accounting profts

A price elasticity of demand of 0.67 implies

demand is inelastic

According to the law of diminishing marginal returns, marginal returns:

diminish eventually

When Dow chemical sells off portions of its chemical product portfolio to reduce switching costs, they do so because of:

diseconomies of scope

The optimal amount of studying for the next exam is determined by comparing

marginal benefit and the marginal cost of studying

An example of price floor is

minimum wages

If a firm is earning negative economic profits, it implies

more information is needed to conclude about accounting profits

If average product is decreasing, then marginal cost

must be less than average cost

If the firm hires 5 workers, the average cost per unit of production equals

need more information

For complements, cross price elasticity of demand is:

negative

When there are economies of scale,

per-unit costs decrease as output increases

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 breakdown?

total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250

# Units Produced Total Revenue Total Costs 0 0 200 1 600 650 2 780 710 3 850 780 4 890 870 5 910 980

use for the next 3 questions

Number of Workers Total Cost 0 1000 1 2200 2 3200 3 4000 4 4600 5 5000 6 5200 7 5600 8 6200 9 7000 10 8000

use for the next 4 questions

Wealth creating transaction are less likely to occur

without private property rights and without contract enforcement