ECON 613 Exam 1

Roomie Jewelers purchased 2,000 ounces of gold at a price of $1,200 per ounce last year and then purchased last month an additional 1,000 ounces of gold at a price of $1,000 per ounce. What's the "opportunity" cost of one ounce of gold in inventory if gold is currently traded at $1,300? a. $1,300 b. $1,100 c. $1,000 d. $1,200

a. $1,300

Samantha has been working for a law firm and earning an annual salary of $80,000. She decides to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a bookkeeper. Samantha will cover some of her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. Assuming that there are no additional expenses, what are the "opportunity" costs? a. $135,700 b. $55,200 c. $100,000 d. $155,200

a. $135,700 (80,000 + 15,000 + 3,000 + 1,000 + 1,200 + 35,000 + 500)

Samantha has been working for a law firm and earning an annual salary of $80,000. She decides to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a bookkeeper. Samantha will cover some of her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. If Samantha's annual revenue is $150,000, what is her "economic" profit? a. $14,300 b. -$5,200 c. $50,000 d. $94,800

a. $14,300 (150,000 - 80,000 - 15,000 - 3,000 - 1,000 - 1,200 - 35,000 - 500)

Firm X produces 1000 units of an item, 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 variable cost? a. $3,000 b. $5,000 c. $1,000 d. $7,000

a. $3,000

A unit of good X costs its producer $100 and sells for $130. A typical consumer values a unit of good X at $150 (i.e., is willing to pay as much as $150 for it). What is the amount of value added when a typical consumer buys a unit of X for $130? a. $50 b. $20 c. $30 d. It cannot be determined

a. $50 ($30 profit, $20 consumer surplus)

Lion Corporation can sell one of its equipment for $1,000,000. Lion's most profitable investment opportunity has an annual profit of 5 percent. The market value of the equipment will fall to $960,000 after a year. Lion could rent the equipment for an annual rent of $120,000. Based on one-year returns, what is Lion's opportunity cost of using the equipment? a. $80,000 b. $120,000 c. $30,000 d. $50,000

a. $80,000 (120,000 - (1,000,000 - 960,000))

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 opportunity (economic) cost of attending the game equals a. $60 b. $140 c. $80 d. $40

b. $140

A unit of good X costs its producer $100 and sells for $130. A typical consumer values a unit of good X at $150 (i.e., is willing to pay as much as $150 for it). What is the buyer surplus (consumer surplus) when a typical buyer purchases a unit of X for $130? a. $50 b. $20 c. $30 d. It cannot be determined

b. $20 ($150-$130)

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 monthly accounting profit? a. $240,000 b. $300,000 c. $450,000 d. $60,000

b. $300,000 ((30,000 items x 15 each) - 150,000)

Gulf Energy has purchased 20,000 barrels of oil at a price of $60 per barrel. If the current price is $70 per barrel, the opportunity cost of using a barrel of oil is _. If the current price is $40 per barrel, the opportunity cost of using a barrel of oil is _. a. 10; -20 b. $70; $40 c. $60; $60 d. $70; $60

b. $70; $40

Firm X produces 1000 units of an item, 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 cost? a. $12,000 b. $9,000 c. $11,000 d. $10,000

b. $9,000 (15,000-3,000-3,000)

-Test 1a) A new firm is contemplating whether to adopt Technology A or Technology B. Assume that a firm's revenues will not be affected by the technology it adopts; and that it, upon entry, will produce 100,000 units per year. -Technology A --Variable cost = $200,000 per year for 100,000 units --Fixed cost = $800,000 with a machine life of 10 years -Technology B --Variable cost = $150,000 per year for 100,000 units --Fixed cost = $1,000,000 with a machine life of 10 years -If you have already purchased Tech A, what if the entire investment is sunk (100%). -what is the economic cost of using Tech A to produce 100,000 units a year? -Test 1b) What if the entire investment is avoidable? what is the economic cost of using Tech A to produce 100,000 units?

-1a) 200,000 or only variable costs -1b) 200,000 + 80,000 = 280,000

Explicit Cost

-= accounting cost -represents cash outflows without depreciation -ex. market supplies goods and services -shows how much money you spend

One of Samsung's subsidiaries produces two products: mobile devices and network chips. The average total cost of producing a network chip is $200; the company then sells the chips to other high-tech companies for $350. Currently, there are enough orders for network chips to keep its factory capacity fully utilized. The company also uses its own chips in the production of mobile devices. The average total cost (AC) of producing the mobile device is $300 plus the cost of two network chips. Assume all of the $300 cost is variable and AC is constant at different output volumes. Each mobile device sells for an average price of $900. 1) Should the company produce mobile devices? Explain why or why not. 2) If we assume that outside orders for network chips are not sufficient to keep the firm's production capacity fully utilized, will your answer to the previous question be different? Explain.

-A network chip costs 200 -> sold for 350 -Network chip can be used for mobile device, cost 300 + 2 network chips -> sold for 900 -Acct. Cost: 300 + 2 x 200 = 700 -Opp. Cost: 300 + 2 x 350 = 1,000 (> 900 so don't produce mobile devices)

Sunk Cost

-An amount of money already spent if the amount is non-recoverable or was incurred by irreversible decisions -often called unavoidable costs

-Example of HCF: Coca-Cola in the 1980s had a diversified product line, including products like aquaculture and wine. But none of these activities earned as much as its soft drink division. The opportunity cost of investing in these unrelated businesses was the forgone opportunity to expand the soft drink division, which at the time was earning a 16 percent return on capital. -Although these other businesses were earning a positive 10 percent rate of return on capital, the opportunity cost of that capital was 16 percent.

-CEO Robert Goizueta correctly decided to sell off these underperforming divisions and invest the capital in its soft drink division. By making decisions whose benefits were greater than their costs, the topic of this chapter, Coca-Cola increased its profitability. -Coca-Cola 1980-84 was almost exclusively equity-financed -The annual opportunity cost of equity-financed capital allocated to each product was 16%

During a year of operation, a firm collects $350,000 in revenue and spends $150,000 on labor, raw materials, rent, and utilities. Tom, the firm's owner, has provided $75,000 of his own money instead of investing the money and earning a 10% annual rate of return. During the year, Tom's only other employment opportunity was holding an executive position at a local business company, earning $100,000 a year.

-Explicit costs (accounting costs or monetary costs)= $150,000 -Implicit costs (foregone interest and salary)= 10%*$75,000+100,000 = 107,500 -Economic costs = Explicit costs + Implicit costs= $257,500 -Accounting profit = Revenue - Accounting costs= $350,000-150,000= 200,000 -Economic profit = Revenue - Economic costs= $350,000-257,500=92,500

You currently pay an annual rent of $10,000 to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house. To raise money for the down payment you would have to liquidate stock earning a 15% return per year. Neglect other concerns, like closing costs, capital gains, and tax consequences of owning a property. Determine whether it is better to rent or own. Show all of your analysis for full credit.

-If you decide to purchase the house, you will need to make a down payment of $20,000 and take out a loan of $80,000 at 9% interest. The annual interest payment on the loan will be $7,200. Your total annual cost of owning the house will be $27,200. -To raise the $20,000 for the down payment, you will need to liquidate stock earning a 15% return per year. This means that you will lose out on the $3,000 in returns that you would have earned if you had kept the stock. Therefore, the total cost of owning the house in the first year will be $30,200. -Comparing the two options, we can see that renting the house is cheaper than owning it. The annual cost of renting is $10,000, while the annual cost of owning is $30,200. Therefore, it would be better to continue renting the house rather than buying it.

An established law firm, Roomies & Partners, is up for sale for a price of $250,000. Simba has personal savings of $250,000 to invest in such an enterprise. Scar, another possible buyer, must borrow the entire $250,000 at a cost of 15 percent, or an interest payment of $37,500 per year. Assume that operating costs remain the same regardless of who owns the law firm. Both Simba and Scar are Southeastern MBA graduates and equally capable of managing the law firm. Does the $37,500 in annual interest expenses make Scar's cost greater than that of Simba? Explain.

-Opp. Cost for Simba = 250,000 x 10% -> 25,000; x 15% -> 37,500; x 20% -> 50,000 -Opp. Cost for Scar = 250,000 -> 37,500

The publisher of the magazine Vogue uses a web press which was purchased five years ago for $2 million with a machine life of 10 years (so the leftover machine life is 5 years). A similar 5-year-old used web press is available for lease or sale. The current competitive rent for a used web press is $180,000 a year and its competitive selling price is $800,000. The selling price is expected to be $680,000 a year from now. Suppose that you are the manager of the publisher and that you are contemplating purchasing a newer-generation web press. What is the opportunity cost to the publisher of using the current web press for another year? Assume that the competitive return on a financial investment is 4%.

-Selling it- 800,000 x 0.04 = 32,000 -Renting it- 180,000 - (800,000-680,000) = 60,000 -Renting it would be the best option -Acct. Cost = 2,000,000 x 1/10 = 200,000

variable costs are also "direct manufacturing costs."

-Some expenses will grow as more units of output are produced. -Examples are the costs of labor, raw materials, and energy

Avoidable Costs

-The opposite concept of sunk costs -These costs can be avoided if certain decisions are made. Thus, when executives weigh the cost of a decision, they as managers should ignore sunk costs but must not ignore avoidable costs.

Implicit Cost

-benefit your forgo when you use owner-supplied inputs -use your own supplied funds

Variable Costs (VC)

-change as output changes -with 0 output is 0 -expenses growing over time

Fixed Costs (FC)

-do not vary with the amount of output -the amount of fixed costs would be independent of how many units are manufactured

Sunk Cost Fallacy Example: -Consider a firm that has been using Technology A for years. It has already paid $500,000 for Technology A and is in debt for the remaining $400,000. The firm is now contemplating adopting Technology B. -Other things being equal, what is the economic cost of Technology A if it can only be used under a grandfather clause of the law by the current owner? In other words, what would be the minimum acceptable price of Technology A if you were to sell it?

-price of Tech A 900,000{500,000 paid, 400,000 owe -Technology B, would still owe the 400,000, but consider only the other benefits because the 400,000 cannot be recovered or avoided -Therefore, if the firm were to sell Technology A, it would seek a price equal to or higher than $900,000 to ensure it recovers its investment and debt obligations.

A can manufacturing company produces and sells three different types of cans: versions X, Y, and Z. After reviewing the statement, company managers are concerned about the loss on Version Z and are considering ceasing production of that version. Should they do so? Why or why not? -add chart from slides

-produce version z or not, 180,000 will be incurred of overhead costs

Fixed and Sunk Cost Fallacy Example: -A firm spent $10 million to develop a product for the market. In the product's first two years, its profit was $6 million. Recently there has been an influx of comparable products offered by competitors (you may call them imitators). -Now the firm is reassessing the product. If it drops the product, it can recover $2 million of its original investment by selling its production facility (i.e., $8 million is sunk). -If it continues to produce the product, its estimated revenues for successive two-year periods will be $5 million and $3 million and its costs will be $4 million and $2.5 million. -After four years, the profit potential of the product will be exhausted and the plant will have zero resale value. -Should the firm continue to produce the product or should it drop the product and sell the production facility?

-spent 10m -> could stop here and recover 2m-> produce 5m (cost 4m) -> produce 3m (cost 2.5m) -8-6.5m = 1.5m

Fixed costs also called "nonrecurring production costs"

-that do not vary with the rate of production -one major kind of __________ is the startup costs involved in building a production facility.

Economic Profit is never > Accounting Profit because

-their explicit costs are not the same -Example: David's Acct. Profit = 0.5m; Ethan's Acct. Profit = 0.4m --David's Econ. Profit = 0.1m; Ethan's Econ. Profit = -0.1m --Economic profit only shows that among all other alternatives that could've been pursued, David would have lost 0.1 elsewhere and Ethan could have made 0.1 more elsewhere

The hidden cost fallacy occurs when

-you ignore relevant costs, the costs that do vary with the consequences of your decision --also fails to include some relevant cost

Opportunity Cost

-you must give up something -the same thing as economic cost --historical acquisition cost: the actual price you pay -important for decision-making or cost that you must include in your decision-making calculation

1) A new firm is contemplating whether to adopt Technology A or Technology B. Assume that a firm's revenues will not be affected by the technology it adopts; and that it, upon entry, will produce 100,000 units per year. Other things being equal, which technology should the new entrant adopt? Assume the cost of capital is 0%. -Technology A --Variable cost = $200,000 per year for 100,000 units --Fixed cost = $800,000 with a machine life of 10 years -Technology B --Variable cost = $150,000 per year for 100,000 units --Fixed cost = $1,000,000 with a machine life of 10 years 2) Consider now an existing firm that has been using Technology A for five years. It has already paid $400,000 for Technology A and is in debt for the remaining $400,000. However, the current market value of Technology A is only $200,000. Other things being equal, will the established firm adopt Technology B?

1) -Tech A: 200,000*10=2,000,000+800,000= 2.8m -Tech B: 150,000*10=1,500,000+1,000,000=2.5m Choose Tech B 2) -Using tech a for 5 yrs and sal. val. = 200,000; still owe 400,000 -over the following 5 yrs = 200,000 / 5 yrs = 40,000 -ignore the sunk cost of the salvage value of 200,000, the relevant cost is its resale (market) value which is 200,000. spread 200,000 over 5 years, it is 40,000 a year. using tech A costs you 200,000 + 40,000 = 240,000 -If you sell Tech A for 200,000, use 200,000 to pay half of the debt. now you adopt tech B. Tech B costs you ___ a year. 150,000 +100,000 =290,000; choose Tech A

When a firm's economic profit is zero, the firm's owner could not have done better putting their resources in some other industry of comparable risk. 1) True 2) False

1) True

Consider an automobile firm that has an inventory of rolled steel that it purchased for $1 million. It is planning to use rolled steel to manufacture automobiles. The price of rolled steel has gone up since the firm made its purchase, so if it resells its steel the firm would get $1.2 million. What is the economic cost to the firm of using the steel?

1.2 million true market value

The average capital invested in Firm X during the year is $20,000. During that same year, Firm X produces an after-tax income of $3,200. If the firm's cost of capital is 12%, what is the economic profit? a. $0 b. $800 c. $1,200 d. $3,200

20,000*12%=2,400; 3,200-2,400= b. $800

Perpetual Bond: pay the initial price, never receive it back, but receive interest payments forever, a project with infinite long life yielding cash inflows 10,000 with 4% coupon rate

400; PV = 10,000 x 0.04

Do Fixed Costs = Sunk Costs?

A portion or the entire amount of fixed cost may be sunk. However, not all fixed costs are necessarily sunk

Long run production

Firms operate in the short run and plan in the long run. In the long run, any desired scale of plant can be built. Thus all elements of the production process are variable.

Total Costs (TC)

Fixed costs + Variable costs

Short run production

Once a firm commits to a production facility of a particular size, it can vary output only by varying the quantities of inputs other than the plant size.

The movie maker Warner Brothers has just finished filming two movies: The Holy Ghost - The Invisible Hand and Tweet King Trump. The Holy Ghost - the invisible Hand cost $50 million and Tweet King Trump cost $80 million. An executive at Warner Brothers says the movie with the higher filming cost should be advertised more than the cheaper one. It is a well-known fact in the industry that a significant portion, if not all, of the filming cost for a movie is sunk. Critique the executive's comment with your own suggestions and reasons why.

While the production cost of a movie is an important factor to consider, it should not be the sole criterion for determining the advertising budget. Instead, Warner Brothers should consider a variety of factors such as the genre, target audience, actors, market trends, and expected ROI when developing an advertising strategy for their movies

A basketball company is considering purchasing a new machine that will double capacity from 100 to 200 balls per day. The machine will occupy 1,000 square feet of "unused" space on the factory floor. Which costs are irrelevant in this decision to purchase a machine? a. Rental expense associated with the 20,000 square foot factory b. Maintenance cost for routine cleaning of the machine c. Additional personnel required to operate the machine d. Additional electricity required to operate the machine

a. Rental expense associated with the 20,000 square foot factory

Your firm usually uses about 200 to 300 tons of steel per year. Last year, you purchased 100 tons more steel than needed (at a price of $200 per ton). In the meantime, the price of steel jumped to $250 per ton delivered (any firm selling the steel must pay any shipping costs), and the price has since stabilized. The cost of shipping steel to the nearest buyer would be $20 per ton. In the meantime, a business next door just went bankrupt and the bank is offering a special deal where you can buy another 100 tons of steel for $180 per ton. Which is correct?

a. Sell your 100 tons at the going market price of $250 and make a profit of $30 per ton ($50 - $20 cost of shipping). b. Buy the 100 tons next door at $180 and resell for a price of $250 less $20 shipping = net profit of $50 per ton. c. Hold onto your 100 tons, and wait until needed for production. (correct) d. Buy the 100 tons next door at $180 and hold onto it until it is needed in production -buy 100 tons at $180 --keep it 250-180 = 70 --resell it 250-180-20 = 50

Which of these assumptions is often realistic for a firm in the long run? a. The firm can vary both the size of its factory and the number of workers it employs b. The firm can vary neither the size of its factory nor the number of workers it employs c. The firm can vary the size of its factory, but not the number of workers it employs d. The firm can vary the number of workers it employs, but not the size of its factory

a. The firm can vary both the size of its factory and the number of workers it employs

The opportunity costs of a "market-supplied" input before its purchase is the dollar costs of obtaining the input in the market. a. True b. False

a. True

The fixed-cost fallacy occurs when a. a firm considers overhead costs to make short-run decisions b. a firm considers relevant costs c. All of the choices are correct d. a firm ignores relevant costs

a. a firm considers overhead costs to make short-run decisions

The hidden-cost fallacy occurs when a. a firm ignores relevant costs b. a firm considers overhead costs to make short-run decisions c. a firm considers irrelevant costs d. All of the choices are correct

a. a firm ignores relevant costs

Toyota announced that it would build a new design and testing center in Michigan on a property the company purchased back in 2003 for $3,000,000. The cost of using the property today exclusively for the design and testing center a. is equal to today's market value of the property b. is zero, because the company already owns the property c. is zero, because the property represents a sunk cost d. depends on the economic value to society of the new design and testing center

a. is equal to today's market value of the property

A unit of good X costs its producer $100 and sells for $130. A typical consumer values a unit of good X at $150 (i.e., is willing to pay as much as $150 for it). You would expect successful managers to ____ in order to increase the size of profit. a. raise the product price or reduce the cost or do both b. lower the product price or reduce the cost or do both c. raise the product price only d. reduce the cost only

a. raise the product price or reduce the cost or do both

When economists refer to a production cost that has already been committed and cannot be recovered, they use the term a. sunk cost b. explicit cost c. implicit cost d. variable cost

a. sunk cost

A manufacturer shares its production capacity across two separate products, washers and dryers. The manufacturer's production capacity is "fully exhausted", so that any increase in the production of one product must entail a decrease in the production of the other. If the profitability of selling washers decreases, then the company will find that a. the opportunity cost of producing and selling dryers decreases b. the opportunity cost of producing and selling dryers is not affected c. the opportunity cost of producing and selling dryers increases d. dryers are more profitable than washers

a. the opportunity cost of producing and selling dryers decreases

Samantha has been working for a law firm and earning an annual salary of $80,000. She decides to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a bookkeeper. Samantha will cover some of her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. If Samantha's annual revenue is $150,000, what is her "accounting" profit? a. -$5,200 b. $94,800 c. $14,300 d. $50,000

b. $94,800 (150,000 - 15,000 - 3,000 - 1,000 - 1,200 - 35,000)

Which of the following costs always must be considered relevant in decision-making? a. Variable costs b. Avoidable costs c. Fixed costs d. Sunk costs

b. Avoidable Costs

A manufacturing company is considering purchasing a new machine that doubles capacity from 500 to 1,000 units per week. The machine will occupy approximately 500 square feet of vacant (unused) space on the factory floor. Which of the following costs are irrelevant in the decision to purchase this machine? a. The additional cost of utilities necessary to run the machine. b. Monthly rental expense associated with the 10,000-square-foot factory. (fixed-cost fallacy) c. Additional machinists who will need to be hired to run the machine. d. Maintenance costs for regular repair and cleaning of the machine.

b. Monthly rental expense associated with the 10,000-square-foot factory. (fixed-cost fallacy)

If a firm must add higher-cost weekend shifts to produce more output, the firm is operating over the period in which a. changes in costs of production result from changes in only fixed costs b. at least one input is fixed in quantity c. the quantity of fixed inputs can be altered d. total cost of producing zero output equals zero

b. at least one input is fixed in quantity

Firm X produces 1000 units of an item, 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 cost? a. $10,000 b. $13,000 c. $12,000 d. $11,000

c. $12,000

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 items sell for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her monthly economic profit? a. $300,000 b. $60,000 c. $240,000 d. $450,000

c. $240,000 ((30,000 items x 15 each) - 150,000 - (8 x 30) x 250)

A unit of good X costs its producer $100 and sells for $130. A typical consumer values a unit of good X at $150 (i.e., is willing to pay as much as $150 for it). What is the profit margin to the seller when a unit is sold for $130? a. $50 b. $20 c. $30 d. It cannot be determined

c. $30 ($130-$100)

Samantha has been working for a law firm and earning an annual salary of $80,000. She decides to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a bookkeeper. Samantha will cover some of her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. Assuming that there are no additional expenses, what is the amount of "implicit" costs? a. $135,700 b. $100,000 c. $80,500 d. $55,200

c. $80,500 (80,000 + 500)

Which of the following is true? a. Accounting costs include all monetary outlays b. Opportunity costs exclude actual cash payments that are already sunk c. All of the statements associated with this question are correct d. Opportunity costs only include avoidable costs

c. All of the statements associated with this question are correct

It is assumed that a firm regards the number of workers it employs variable but the size of its factory fixed. This assumption is often realistic a. in the long run, but not in the short run b. both in the short run and in the long run c. in the short run, but not in the long run d. neither in the short run nor in the long run

c. in the short run, but not in the long run

At any given level of output, the difference between the total cost and the fixed cost is a. the average fixed cost b. the average total cost c. the variable cost d. the average variable cost

c. the variable cost

variable costs are also "recurring production costs"

can be measured on a basis of daily output, monthly output, or annual output

Amortizing

costs are spread over a period of time

Expensing

count for costs as they are incurred

An established firm uses Technology A to produce good X. It has already paid $4,000,000 and is in debt for $3,000,000. If the next best alternative use of Technology A is producing good Y for a profit of $200,000, what is the opportunity (economic) cost to the established firm of the current use of Technology A? a. $3,800,000 b. $3,200,000 c. $2,800,000 d. $200,000

d. $200,000

Samantha has been working for a law firm and earning an annual salary of $80,000. She decides to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a bookkeeper. Samantha will cover some of her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500. Assuming that there are no additional expenses, what is the amount of "explicit" costs? a. $100,000 b. $155,200 c. $135,700 d. $55,200

d. $55,200

A firm wishes to shut down an office and fire 100 employees. The company will save $3,000 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 $1,500. What should the company do? a. Do not fire the employees, keeping them generates a profit of $1,100 per employee b. None of the choices are correct c. Fire the employees and save $1,500 on rent d. Do not fire the employees since keeping them generates a profit of $1,085 per employee

d. Do not fire the employees since keeping them generates a profit of $1,085 per employee ((4,100 x 100) - (3,000 x 100) - 1,500) / 100

For a restaurant, all of the following are examples of variable costs, except a. Labor costs b. Cost of raw materials c. Costs of utilities d. Rents on dining space

d. Rents on dining space

A fixed cost is a. a cost which increases in a fixed proportion as output increases b. the cost of any input with a fixed price per unit c. All of the choices are correct d. a cost the firm must pay even if output is zero

d. a cost the firm must pay even if output is zero

All of the following are examples of accounting costs, except a. depreciation expenses related to investments in buildings and equipment b. costs paid to suppliers for product ingredients c. interest payments on borrowed funds d. cost of equity-financed capital

d. cost of equity-financed capital

When a firm is trying to decide on the optimal "plant size" a. the quantity of fixed inputs cannot be altered b. variable costs cannot be altered c. total cost of producing zero output equals fixed costs d. none of the inputs are fixed in quantity

d. none of the inputs are fixed in quantity

A manufacturing firm is incurring fixed costs in the short run, like its building and machinery costs. Given these fixed costs, these fixed costs would increase if the manufacturer were to increase production a. these fixed costs would increase if the manufacturer were to increase production b. under no circumstances would these fixed costs change c. these fixed costs would increase if the manufacturer were to decrease production d. these fixed costs would not vary with the level of production

d. these fixed costs would not vary with the level of production

Economic Profit

revenue - explicit - implicit also = NPV

Accounting Profit

revenue - explicit/acc. cost

Steven Spielberg has been making a movie "Homebound Hope." 100 days into filming, the cost of filming has already run as high as $150 million and about $120 million of the $150 million has sunken. It has been estimated that an additional $50 million is needed to complete the movie, yet the movie will lose money. Describe the conditions under which YOU would recommend that the movie be completed. In other words, what is the minimum acceptable amount of movie sales revenue before it makes economic sense to stop filming?

spent 150m -> could stop and recover 30m -> go forward and spend another 50m -> ticket sales need to be at least 80m to recover expenses

Managers fail to ignore _____ _____ in their decision-making calculus

sunk cost

Relevant Cost

the costs that occur as a result of the decision making

-Consider an automobile firm with an inventory of rolled steel purchased for $1 million. It is planning to use rolled steel to manufacture automobiles. The price of rolled steel has gone up since the firm made its purchase, so if it resells its steel the firm would get $1.2 million. -What would be the economic cost if the current market price of steel is $0.9 million?

the economic cost would be 0.9m

Fixed costs also called "zero-output costs"

you will have to sign checks for items like licenses, rent, upkeep, and maintenance even when output equals zero.