Chapter 2: The Key Principles of Economics

An oil refinery bought a million barrels of oil a month ago comma when the price was only $75 per barrel compared to $120 today. The cost of using a barrel of oil to produce gasoline is $ 75. A) The most recent price is the relevant costThe most recent price is the relevant cost. B) All relevant costs have been included in this example. C) The purchase price is the relevant cost.

A) The most recent price is the relevant costThe most recent price is the relevant cost.

Jen left a job paying ​$80,000 per year to start her own florist shop in a building she owns. The market value of the building is ​$120,000. She pays ​$35,000 per year for flowers and other​ supplies, and has a bank account that pays 12 percent interest. What is the economic cost of​ Jen's business? $___(1)___

1) 129400 $120,000 x 12% = $14,400 + $80,000 + $35,000 = $129, 400 The economic​ cost, or total opportunity​ cost, of​ Jen's business includes all the costs of operating the​ business: These include forgone income​ (from the job she​ left), cost of supplies and​ inventory, and the forgone interest income​ (from the​ building).

Oprah just inherited a house with a market value of ​$50,000 and she does not expect the market value to change. Each​ year she will pay ​$400 for utilities and ​$5,000 in taxes. She can earn 5% percent interest on money in a bank account. Her cost of living in the house for the year is $ ___(1)___

1) 7900 $50,000 x 5% = $2,500 + $400 + $5,000 = $7,900

Conservationists have a new strategy for preserving​ rainforests: ___(1)___ loggers and other developers for the​ land, paying as little as ___(2)___ per hectare per year.

1) bidding against 2) $1 When the payoff from developing tropical forest land is relatively​ low, conservation groups can outbid developers at a price as low as​ $1 per hectare.

A decrease in the market interest rate ___(1)___ the economic cost of holding a​ $500 collectible for a year.

1) decreases

An increase in the wage for​ high-school graduates ___(1)___ the opportunity cost of college.

1) increases

If a commuter rides a bus to work and the bus fare is $2, the cost of commuting by bus is $2. A) All relevant costs have been included in this example. B) The relevant cost would include the value of the commuter's time. C) The relevant cost would include the roundtrip cost.

B) The relevant cost would include the value of the commuter's time.

​Carlos, who lives in a country where interest rates are very​ high, goes to an ATM every day to get​ $10 of spending money. John​, who lives in a country with relatively low interest​ rates, goes to the ATM once a month to get​ $300 of spending money. Why does Carlos use the ATM more​ frequently? A) John​'s opportunity cost of holding cash is higher. B) High interest rates imply low banking fees. C) Carlos' opportunity cost of holding cash is higher. D) Carlos ​doesn't like to carry a lot of cash.

C) Carlos' opportunity cost of holding cash is higher. The opportunity cost of holding cash is the forgone interest. The higher the interest​ rate, the higher the opportunity cost.

What is the economic cost of a pair of warships purchased by​ Malaysia? A) The cost of materials and labor plus interest on loans from the IMF. B) 200 tanks. C) Safe drinking water for 5 million people who lack it. D) None of the above.

C) Safe drinking water for 5 million people who lack it.

The United States has plans to spend billions of dollars on a mission to Mars. Various resources will be used to execute the​ mission, and sacrifices will be made to use those resources. Which of the following are possible opportunity costs of the​ mission? A) Colonizing the moon. B) Hiring 1.8 million additional teachers for one year. C) Setting up a missile defense system. D) All of the above.

D) All of the above. Most decisions involve several alternatives. To determine the opportunity cost of a trip to​ Mars, we must consider which of these is the next best alternative. All of the above are possible opportunity costs of a trip to Mars.