Chapter 1 Practice Exam

A friend comes up to you and offers you a free ticket to a Dodgers game that night, and you decide to attend the game. The game takes five hours and costs you $25 for transportation. If you had not attended the game, you would have worked at your part-time job for $12 an hour. What is the cost to you of attending the game?

$85

(Figure: Recliners and Couches) American Signature is a furniture company based in Columbus, Ohio. The graph represents American Signature's production possibility frontier for manufacturing couches and recliners.

300000 recliners

Vincent makes handcrafted dining tables, and he is trying to decide how many tables to produce. He can sell each dining table for $1,000. The cost of the first table is $900, for the second it's $1,100. For each additional table he produces, the marginal cost of each table increases by $200. How many dining tables should Vincent produce, and what is the total cost of his production?

He will produce one table at a cost of $900.

How is the economic surplus generated by a decision calculated?

It is the total benefits minus total costs arising from the decision.

An investor is franchising a new type of fitness studio that will be the first in the city and must determine how many locations to open. For each location, they will hire a manager for a salary of $4,000 per month and two part-time employees who will earn $2,000 each per month. The investor values their time spent overseeing each location at $7,500 per month. Additional operating costs, including rent and utilities, will be $6,000 per month at each location. The investor projects that when the business gains traction, the first location will have 1,000 members. The second location will bring in 900 members. The third and fourth locations will bring in 300 and 200 members, respectively. The monthly membership fee will be $70 per member. The investor has decided to definitely open two locations. Should they open a third location?

No, because marginal cost would exceed marginal benefit.

The cost-benefit principle evaluates _____ costs and benefits, and willingness-to-pay considerations quantify _____ costs and benefits.

both monetary and nonmonetary; only nonmonetary

The interdependence principle states that your best choice today depends on all of these EXCEPT:

past decisions you have made.

A central and fundamental theme in economics is that:

resources are limited and cannot satisfy all the ways a society wants to use them.

Dependencies over time reflect the fact that:

resources can be spread across time.

The marginal cost of an additional worker is:

the additional cost of hiring one more worker.

Rose's parents have booked and paid for a family trip to Aspen, Colorado, during her spring break. Rose's friends recently decided to drive to Destin, Florida, for spring break. Rose needs to decide whether to join her parents in Aspen or drive to the beach with her friends. The opportunity costs of joining her friends on the trip to Destin include each of these EXCEPT:

the ski lift ticket her parents have already purchased for her.

It is a rainy day, and you are considering taking an Uber one mile to meet some friends. You have decided you are willing to pay $20 to avoid getting wet from the rain. The trip would normally cost you $8, but due to the weather the surcharge is triple the regular cost. You should _____ because the benefit to you of taking the Uber is _____ than the cost.

walk; less

A doctor has worked as a general practitioner for several years, earning an annual salary of $150,000. They are now deciding whether they want to open their own private practice or continue as a team member in the existing office. One-time start-up costs for the practice would be $100,000. If they open their own practice, they will receive a salary of $50,000 from the business annually until the practice is well-established. They anticipate the practice will take two years to become fully established. They paid $200,000 for medical school. They should open their own practice if the future benefits exceed:

$300000

The opportunity cost of a good is:

the value of the next best alternative given up to acquire the good.

Juan is willing to pay $900 for a new iPad. He offers to pay $800 for an iPad at the Apple store. It costs Apple $700 to produce this iPad. A voluntary economic transaction between Juan and Apple _____ occur because _____ would be better off due to the transaction.

will; both Juan and Apple

You are a small business owner preparing to launch your first ad campaign to attract new customers, and must decide whether to learn about advertising yourself or hire a professional to launch the campaign. The campaign will last three months. If you hire a professional, you'll have to pay them a lump sum of $1,000 for the entire campaign. But if you decide to do it yourself, you'll take a course that costs $200 to introduce you to the skill. You'll also pay an employee $340 per month to work some of the hours you normally work while you manage the campaign. Would it be better to hire a professional rather than doing the campaign yourself?

Yes, because your economic surplus is $220.

You just moved into your new apartment, which has washer and dryer hookups, but your apartment complex doesn't provide washers and dryers. You don't want to go to a laundromat. You can rent a washer and dryer set from an appliance rental company for $30 per month. Alternatively, you could buy a set for $1,100, which you could sell after one year for $700, or $600 after two years. You plan to stay in this apartment for two years, since it's near your job. Should you buy or rent the set?

You should buy the set because buying earns $220 worth of economic surplus.

The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:

scarcity

Following the Rational Rule, the maximum economic surplus occurs when:

marginal benefits equal marginal costs

Charles is a manager at a coffee shop, and he has to decide how many workers to hire. One worker can make 25 drinks that sell for $5 on average in one hour. A second worker can make another 20 drinks in one hour. The marginal benefit of each additional worker decreases by five drinks, with each additional hire. Given that workers are paid $15 per hour and have eight-hour shifts, how many employees should Charles hire for each hour?

five