Economics for Mangers- Suppliers and Cost
At what prices will a maximum of 40$3.0000 gallons of gasoline be produced? Select all that apply. $2.00 $2.50 $3.00 $3.50
$2.00 At this price, firms will first start supplying 4000 gallons. $2.50 At this price, firms will continue to supply 4000 gallons, as the price is not high enough for it to be profitable for firms to supply more.
Suppose the farm equipment manufacturer from the previous question was able to charge $30,000 per tractor, and produces and sells 2,000 tractors per year at that price. As a reminder, the company originally spent $3 million in research and development costs. The company now spends $20 million at the beginning of each year to rent a factory, and $10,000 per tractor in materials and wages. If another manufacturer enters the market in the middle of a year and engages the company in a price war, what is the lowest price the company would be willing to charge for each tractor? $10,000 $11,500 $20,000 $21,500
$10,000 The company should be willing to produce tractors as long as the price they sell for covers the variable costs of production
The average total cost to bake 100 cookies is $0.17 per cookie. The marginal cost is constant at $0.10 for each cookie produced. The total cost to bake 100 cookies is: $7.00 $10.00 17.00 $27.00
$17.00 The average total cost of $0.17 per cookie includes both marginal cost ($0.10 per cookie) and fixed cost per unit ($0.07 per cookie). The total cost of baking 100 cookies is the average total cost multiplied by the number of cookies.
Patrick is considering opening a bowling alley in his town. The total costs to build the alley would be $2 million, which would include 24 lanes, machinery, the front desk, a snack bar, pins, bowling balls and shoes. Patrick estimates that customers would bowl roughly 5000 games per year on each of the lanes. In order to operate the alley, Patrick must have 6 employees working at all times. He anticipates keeping his business open 12 hours per day, 365 days per year and paying each employee $15/hour. How much would Patrick have to charge for each game bowled to turn a profit within a year? $2.00 $5.00 $16.67 $19.96
$19.96 To recover his fixed costs in a single year, Patrick must charge almost $20 per game! This is far too much for a game of bowling. He will have to charge lower prices and recover his fixed costs over a longer period of time.
A farm equipment manufacturer has already spent $3 million in research and development to design a new model of tractor. To produce the tractors, the company will have to contract to rent a factory for a year at a cost of $20 million, and will then spend an additional $10,000 per tractor in materials and wages. The company estimates that it can sell 2,000 tractors per year at a certain price, and concludes that it should produce the tractors. What is the lowest price the company could be using in this calculation $10,000 $11,500 $20,000 $21,500
$20,000 The company needs to earn enough on each tractor to cover the fixed costs of operating for a year. $20 million spread over 2,000 tractors is $10,000 per tractor, so adding in the variable costs, the company needs to sell each tractor for $20,000
An IT entrepreneur is considering entering the PC support industry. She estimates that the annual costs associated with renting an office, computers, and phones are $45,000. Utilities, such as electricity, water and heat, will run her $600/month. To be competitive, she would need to pay her potential employees' wages of $20/hour. The total number of support hours these employees would cover for a year would be 5,742. What is the lowest price per hour at which the entrepreneur should consider entering the industry? $9.10/hour $20.00/hour $27.84/hour $29.10/hour
$29.10/hour Fixed costs are equal to ($45,000) + ($600 * 12 months) = $52,200 for rent, computers, phones and utilities. Variable costs are equal to ($20/hour * 5742 hours) = $114,840 for wages. Total costs are thus equal to $52,200 + $114,840 = $167,040. Divide these costs of $167,040 by 5,742 hours for an hourly minimum bill rate of about $29.
Patrick recognizes that customers will not likely pay more than $5.00 per game to bowl at his alley. If Patrick charges this amount, how many years will it take him to turn a profit? (Assume that customers will still demand to bowl 5,000 games each year on each lane at the alley) Recap of costs: The total costs to build the alley would be $2 million, which would include 24 lanes, machinery, the front desk, a snack bar, pins, bowling balls and shoes. Patrick estimates that customers would bowl roughly 5000 games per year on each of the lanes. In order to operate the alley, Patrick must have 6 employees working at all times. He anticipates keeping his business open 12 hours per day, 365 days per year and paying each employee $15/hour. Just over 3 years Just over 5 years Just under 7 years Just under 10 years
-Just under 10 years If Patrick were to charge $5 per game, he would make ($5.00 per game)*(5,000 games per lane per year)*(24 lanes) = $600,000 per year in revenues. His costs would be equal to (6 employees)*($15 per hour)*(12 hours per day)*(365 days per years) = $394,200 per year. Thus, each year he would make $205,800 in profits. At this rate, it would take him $2,000,000/$205,800 per year = 9.72 years to recover his initial investment to build the alley.
A ticket broker purchases two tickets to an upcoming concert for $30 each, although the original ticket holder would have been willing to sell each ticket for $10. The ticket broker later sells the tickets to a new buyer for $50 each. If the new buyer would have been willing to pay up to $90 for each ticket, what fraction of the total value created is captured by the broker? 2/9 1/4 5/9 5/8
1/4 The ticket reseller captures $20 in profit on each ticket ($50 - $30). The total value created is $80 per ticket ($90 - $10).
If the price for a barrel of oil is currently $42, what is the amount of barrels produced by these suppliers 140,000 barrels Between 140,000 and 220,000 barrels 220,000 barrels Between 220,000 and 320,000 barrels
220,000 barrels Both Green House Oils and Shale Ale will produce at full capacity at a price of $42. Fossils R Us will not produce any oil.
Which of the following firms would benefit most from having dominant market share on a national level? A chain of bookstores that incurs fixed costs every time it opens a new store A law firm that faces large labor costs. A fast food restaurant that incurs fixed costs to set up new locations, but low variable costs per customer. A pharmaceutical company that produces a drug at very low variable cost once it has incurred enormous fixed costs in research and development on the drug.
A pharmaceutical company that produces a drug at very low variable cost once it has incurred enormous fixed costs in research and development on the drug. This company's fixed costs scale well as it expands nationally.
Although labor is typically viewed as a variable cost in the very short run, some labor costs may be fixed. Which of the following items represents an example of a fixed labor cost? A salaried clerk who has a two-year employment contrac A cashier who is paid on an hourly basis A part-time student who works at a fashion boutique twice a week All of the above
A salaried clerk who has a two-year employment contract Regardless of the change of outputs in the company, the clerk is still being paid at a fixed salary for two years.
A college has found that some of its graduating students accept offers from Amazon that pay less than offers at other companies. Which of the following is the most likely explanation for this scenario? Employees at Amazon do not value salary as much as employees at other companies. Employees at Amazon are less qualified than ones at other companies Amazon has been able to lower some of its employees' WTS for their labor. Amazon has a lower WTP for employees.
Amazon has been able to lower some of its employees' WTS for their labor. Students may be willing to work for Amazon for a lower salary because of the work culture, or benefits of having Amazon on their resumes, or for other reasons.
The theme park from the previous question has finished building its fun house. The project cost $240,000 in total and requires two employees to operate it each day costing $50 per employee per day. The park estimates that approximately 400 guests will enter the fun house per day, each paying $1 to enter. After how many years will the theme park break even from operating the funhouse? Within 1 year Between 1 and 2 years Between 2 and 3 years After 3 years
Between 2 and 3 years The park makes $400 in revenues each day from guests and must pay $50*2=$100 to its employees each day as costs of operation. Profits per day are thus equal to $400-$100=$300. With these profits, it will take the park 800 days to recover the total amount it spent building the fun house
Which of the following regarding fixed costs is/are true? Select all that apply. The higher the fixed costs it experiences, the lower a firm's profits will be Companies that incur fixed costs primarily at the level of an individual store are likely to face difficulties scaling their businesses. Industries that don't have high fixed costs will have few barriers to entry Fixed costs do not always imply that the bigger firm will experience cost advantages Companies that experience fixed costs mainly at the local level gain no benefits in scaling up operations to the national level.
Companies that incur fixed costs primarily at the level of an individual store are likely to face difficulties scaling their businesses. True—these companies will necessarily incur fixed costs for every new store, decreasing the benefits of scaling and/or making it more difficult to do so. Fixed costs do not always imply that the bigger firm will experience cost advantages. True—bigger does not necessarily imply better. Bigger firms may suffer from various inefficiencies related to increased production or scale, potentially driving up costs.
Al's Autos, a car rental company, spends $2.1 million per year on car purchases, routine maintenance and other fixed costs. The company rents out cars at an average rate of $100 per day, and incurs variable costs of $70 per day for each rental. In past years, the business has rented out 100,000 cars per year. However, the city in which the company is located has become a less popular tourist destination, causing consumers to travel there less frequently. The rental company anticipates that it will have 25% fewer customers in coming years. What should Al's do? Definitely stay in business Decrease prices to $70 per day Exit the car rental industry
Definitely stay in business Despite the large drop in rentals from 100,000 to 75,000, Al's is still able to cover both variable and fixed costs. It should remain in business for the time being, unless it continues to lose customers to the point at which it can no longer cover its total yearly costs.
Which of the following developments will cause an increase in the value created by a firm? Select all that apply. Employees at the firm are willing to take a pay cut to work for the company. Consumer preferences change and average WTP for the company's products increases. The company is able to increase the price of its main product without a significant decrease in sales. The rate at which the company is taxed is decreased by the government.
Employees at the firm are willing to take a pay cut to work for the company. This would decrease suppliers' willingness to sell a key input, creating more value overall. Consumer preferences change and average WTP for the company's products increases. If customers' are willing to pay more, but the company leaves prices the same, it is creating more value for its customers without decreasing the value captured by the firm or its suppliers.
An entrepreneur is seeing if he should enter into a new market. His new plant would have double the capacity of the other plant currently in the market. He estimates that his average cost per product will be $400, $200 of those variable costs. He estimates that the other plant currently in the business has average costs of $600, $300 of those variable costs. Should he build his plant? Yes, since the average costs of the new plant will be lower than the incumbent plant. Yes, since the variable costs the new plant will be lower than the incumbent plant. Yes, since the new plant will have double the capacity, the entrant will be able to sell double the amount and gain more profit than the other plant. He should not build the plant.
He should not build the plant. Since his average costs are higher than the incumbent company's variable costs, he should not enter the industry. If the entrant tried to do so, the incumbent could drop prices down to its own marginal costs.
Which of the following regarding supply curves is NOT true? The higher the price, the more firms will be willing to produce. In the short run, a steep fall in prices will force the least efficient producers to exit the industry. A supply curve can be thought of as a relative cost analysis for all the firms in an industry. In the long run, the industry supply curve should take into account both variable costs and fixed costs.
In the short run, a steep fall in prices will force the least efficient producers to exit the industry. In the short run, a firm is only able to make decisions on its volume of production. Entry/exit decisions are long run considerations. Thus the least efficient producers will stop producing but will not be able to exit the industry in the short term.
ou are earning $40,000 per year as a branch manager at Dunkin Donuts. You are planning on leaving your job and going back to college; upon learning this, your branch manager offers you a 10% increase in salary to stay. Knowing this, how does the opportunity cost of going to college change? It remains unchanged because the cost of room, board, and tuition has not changed. It decreases because you now have more resources to afford college education It increases because you are foregoing more money for college.. It remains unchanged because the benefits of attending college have not changed.
It increases because you are foregoing more money for college. The rise in salary increases the opportunity cost of going to college because you are foregoing a higher cost that you could have been earned by not going to college.
An entrepreneur has developed a method of manufacturing light bulbs that significantly reduces the costs of production. The entrepreneur should enter the industry if: Its average cost per light bulb is less than existing manufacturers' average cost per light bulb. Its average cost per light bulb is less than existing manufacturers' variable cost per light bulb. Its variable cost per light bulb is less than existing manufacturers' variable cost per light bulb. Its fixed cost per light bulb is less than existing manufacturers' fixed cost per light bulb.
Its average cost per light bulb is less than existing manufacturers' variable cost per light bulb.
Which of the following conditions could cause an industry to have a small number of firms? Select all that apply. Low variable costs Network effects High customer willingness to pay Low opportunity costs of entering the industry High fixed costs
Network effects If a product exhibits network effects, the dominant suppliers in the industry grow more and more successful as existing customers draw in new customers. This leads to industries with a few large competitors rather than many small ones. High fixed costs High fixed costs can act as a barrier to entry. New firms will be less willing to enter an industry if they will have to incur large fixed costs in order to compete with incumbent firms.
The owner of Company B is considering starting a price war with Company A to eliminate a smaller competitor in its industry. Would it be a wise decision for Company B to enter a price war with Company A? No, because Company A has more flexibility to increase output and lower costs Yes, because Company B's cost structure allows it to lower prices further than Company A.. No, because Company B cannot price low enough to force Company A to exit the industry. Yes, because Company B has greater market share than Company A.
No, because Company B cannot price low enough to force Company A to exit the industry. It costs both firms $0.75 per unit. Thus, Company B cannot force A to leave the market by pricing lower than its variable cost-per-unit.
The table below shows fixed and variable costs per unit for an ice cream shop, "Company A," and its local competitor, "Company B." Costs for rent and utilities are fixed by contract, and the two shops produce the same flavor of ice cream. The owner of Company A is considering lowering the price of its ice cream, starting a price war with Company B in an effort to grab market share from its competitor. Would it be a wise decision for Company A to enter a price war with Company B? No, because Company B's cost structure allows it to lower prices further than Company A. No, a price war will be ineffective when the two companies have the same total costs per unit. Yes because Company A's cost structure allows it to lower prices further than Company B. Yes, because Company A has greater market share than Company B.
No, because Company B's cost structure allows it to lower prices further than Company A. A price war would be won by the company that can lower its prices the most. The ability to lower prices is based off of the variable costs per unit.
Suppose that you are the CEO of a national pizza chain. Your business has experienced increases in production costs over the past few years due to a continual increase in the price of cheese. When the price increases first started, your business was able to maintain its profitability by passing the higher costs on to consumers in the form of higher pizza prices. Now, however, your consumers are refusing to pay more for your product. One of your company's executives suggests acquiring your supplier of cheese in order to control input costs. By doing so, she guarantees that your company will retain your customers and stop losing money. Should you take her advice? Yes-- you should do anything to retain your customer base. No—in doing so, you may retain your customers, but you will still continue to lose money overall. No—customers will still continue to leave you even if you control price increases by buying the supplier.
No—in doing so, you may retain your customers, but you will still continue to lose money overall. Your colleague is forgetting to include opportunity costs in her reasoning. Even if you acquire the supplier, you will continue to lose money from an economic point of view. This is because you could have sold the cheese to others for a higher price than what you are receiving for it by putting it in your pizzas.
Despite having sufficient snow, a local ski mountain has decided to close in early March for the end of the ski season. What is the most likely reason to shut down in this situation? Owners expect that revenue will not cover total costs. The owners decided to go on a vacation to Florida. Other mountains nearby have shut down for the season. Owners expect that revenue earned won't cover variable costs.
Owners expect that revenue earned won't cover variable costs. If the revenue is not enough to cover operating costs, the ski resort would have no reason to stay open.
A ticket reseller purchases a ticket to a football game for $40 and offers it for sale at a price of $75. A consumer is willing to pay $90 at most for the ticket, and purchases it at $75. What does the $50 difference (between $40 and $90) represent? Profit Consumer surplus Profit + consumer surplus
Profit + consumer surplus The difference between WTP and price is consumer surplus, and the difference between price and cost is the profit.
Which of the following regarding economies of scale is true? Firms that benefit from economies of scale in production will continue to do so as they increase output. Economies of scale can operate at the level of the individual firm or industry, but not on the local level. Scale economies can be either positive or negative, or both, based on a firm's size. Firm size is the sole determinant of whether a business is able to decrease costs from scaling production.
Scale economies can be either positive or negative, or both, based on a firm's size. A firm or industry can exhibit both economies and diseconomies (negative economies) of scale depending on its level of output. Economies of scale tend to benefit firms/industries most as they increase output from low levels, while diseconomies of scale occur as they continue to increase production from high to even higher levels.
Which of the following is true about "volume businesses?" Such businesses typically exist in markets with many other competitors. Such businesses typically have very high minimum efficient scales of operation Such businesses can typically handle big drops in prices for their product or service Such businesses can typically recover their fixed costs quickly..
Such businesses typically have very high minimum efficient scales of operation. Such businesses need to produce large volumes to spread their fixed costs over large volumes in order to have any chance of recovering their large fixed investments.
An entrepreneur is considering starting a new business to produce and sell gourmet cookie dough. The entrepreneur estimates that the average total costs per pack of dough would be $7, of which variable costs per pack would be $5. An incumbent bakery in the neighborhood sells cookie dough for $10 per pack. The entrepreneur estimates that this bakery spends $8 in total costs on each pack of dough, $7 of which is variable costs. Should the entrepreneur start the new business? The entrepreneur should start the new business ONLY if customers are willing to pay at least $1 more for the new dough than for the incumbent's dough, so the entrepreneur can make some profit and grow the business. he entrepreneur should start the new business as long as customers are willing to pay at least as much for his cookie dough as for the incumbent's product. The entrepreneur should definitely start the new business because his variable cost per pack of dough is already lower than that of the incumbent bakery The entrepreneur must be indifferent to starting the business because his average cost per pack is equal to his established rival's variable cost per pack.
The entrepreneur should start the new business as long as customers are willing to pay at least as much for his cookie dough as for the incumbent's product. Since the entrepreneur's average cost per unit is equal to the established competitor's variable cost per unit, the entrepreneur should pursue the venture if customers' are willing to pay at least $10 for the entrepreneur's dough.
Christine is a tax accountant in the United States. Due to the complexity of the U.S. tax code, many Americans often experience difficulties filing their taxes each year. Thus, in the past, Christine has made a large sum of money on the side offering her services during tax season. This year, however, a new computer software is being sold, designed to assist Americans with their taxes for a fraction of the cost that Christine has been charging her customers. At first glance, the software appears to be quite popular. What impact will this new software have on Christine's profitability? The presence of the software will make Christine's business less profitable. The presence of the software will make Christine's business more profitable. The presence of the software will not affect Christine's profitability. The impact on Christine's profitability is unclear.
The impact on Christine's profitability is unclear. It's unclear how the presence of the software will affect Christine's profitability. While the introduction of the software will almost surely force Christine to charge a lower price for her services to compete, Christine's profitability also depends on her own costs. If Christine is able to use the service to improve her own productivity, her costs may also go down. If costs fall low enough, Christine may be able to maintain the same profitability or even improve her profitability if the software allows her to save time per customer and take on more customers.
A pool supply store is considering eliminating its physical locations and offering its products completely online. Which of the following costs would the store be able to eliminate from this transition? Select all that apply. The costs of rent and utilities from its physical shops The salaries of pool specialists responsible for assisting customers The shelving costs needed to display its product offerings The costs of advertising the store brand and its products
The shelving costs needed to display its product offerings These costs would disappear once the store transitioned online. The costs of rent and utilities from its physical shops These costs would disappear once the store transitioned online
Which of the following represents an economic cost, but not an accounting cost, of building and running a summer resort? (Select all that apply.) The wages paid to the workers hired to run the resort and tend to its guests. The wages lost by the owner in pursuing his own venture, instead of working for an already established resort. The cost of materials to build the main hotel, pools and guesthouses. The money foregone by using the land on which the resort will stand, instead of selling it or using it for another venture. The cost of hiring accountants to keep track of the company's books.
The wages lost by the owner in pursuing his own venture, instead of working for an already established resort. This is an opportunity cost for the new owner and should be taken into consideration when determining the economic cost of the new resort. The money foregone by using the land on which the resort will stand, instead of selling it or using it for another venture. This is an opportunity cost and should be included in the economic cost.
Which of the following statements is true? Select all that apply. Some producers in this nation have a lower average variable cost than that of all of the producers on the other island There are likely fewer producers of gasoline on this island. There are likely more producers of gasoline on this island. At a price of $3.50 per gallon, more gasoline is produced on this island nation than on the first. At a price of $3.25 per gallon, firms have a higher combined gross revenue on this island nation than on the first
There are likely more producers of gasoline on this island. This would be reasonable to assume. A smoother supply curve implies that there are a larger number of firms willing to produce smaller volumes of gasoline than in the first. At a price of $3.25 per gallon, firms have a higher combined gross revenue on this island nation than on the first. At this price, more gasoline is produced on this island than on the other one. Firms are willing to produce at this price point, meaning they must be earning some revenues from the new sales. Some producers in this nation have a lower average variable cost than that of all of the producers on the other island. On this island gasoline is produced at a price below $1.50 per gallon, implying that at least some firms find it profitable to produce and sell gasoline. This implies that the average variable cost of some firms is below $1.50, which cannot be said about any of the firms on the other island. On the first island, no firms produced until the price reached $1.50.
An increase in the popularity of corn ethanol as a fuel increases the demand for corn around the world, causing the price to rise. What is the reason behind the higher price? To meet higher demand, the industry relies more on less cost efficient producers of corn Higher fixed costs incurred in order to meet demand end up increasing the cost of production.. Corn ethanol's relative inefficiency as a fuel raises production costs for corn producers. The opportunity cost for supplying corn is higher than before.
To meet higher demand, the industry relies more on less cost efficient producers of corn. As more corn is demanded, the additional corn will be produced by less efficient suppliers, and prices will increase to cover their costs.
A manufacturing company has seen a decline in its physical sales over the past few years, leaving a portion of its fixed infrastructure underutilized. What are some reasonable measures the company could potentially take to maintain its profitability? Select all that apply. Recognize some of its revenue from pre-orders early Try to cut fixed costs in other areas where possible Produce more of the product and save the excess supply as inventory until demand picks back up Advertise its offerings more to drive sales back up to its original level Rent out the underutilized space to other companies for additional revenues Recognize some of its revenue from pre-orders early
Try to cut fixed costs in other areas where possible Cutting other fixed costs, such as salaries, could decrease costs enough so that the company is able to capture the same amount of value (profits). Rent out the underutilized space to other companies for additional revenues This could help improve profitability as the space is not being utilized anyway. If demand does pick back up, the company could take back the space or rent out more space itself.
A factory currently manufactures and sells 800 boats per year. Each boat costs $5,000 to produce. $4,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders increase to 1000 boats per year, how do per-unit costs change? Variable costs fall to $3,200 per boat and fixed costs fall to $800 per boat Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat Variable costs are unchanged at $4,000 per boat and fixed costs are unchanged at $1,000 per boat Variable costs rise to $5,000 per boat and fixed costs are unchanged at $1,000 per boat
Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat The $800,000 in fixed costs is now spread across 1,000 boats. This results in $800 in fixed costs per boat. Variable costs are unchanged.
A startup company is currently selling each unit of its product for $10.00 less than its total costs per unit. If the startup has an opportunity to expand its customer base by 10% through a marketing campaign, should the company consider the campaign? No, the company should shut down to avoid further losses. Yes, if the additional customers would lower the average cost enough to make the firm profitable. No, since the company is losing money on each unit sold, a greater quantity would lower profits further. Yes, because more customers now will result in more profit in the future.
Yes, if the additional customers would lower the average cost enough to make the firm profitable. As output increases, fixed costs per unit will decrease. This may lead to low enough average costs that the firm will be profitable.
