Microeconomics Exam 1 (Ch. 1)

Last year, you purchased land to build a retail store. You paid $20 million for the land. Another business has now offered $8 million for the land and that is the highest price your business should now be able to get for the land. Which of the following costs is relevant for your decision as to whether or not you should build a new retail store? A. $8 million B. $12 million C. $20 million D. $28 million

A. $8 million The $20 million is a sunk cost. The $8 million is the best offer and that is the opportunity cost. That is what one would give up if you built a new retail store now.

I started a business last year. My revenues were $100,000. My rent and materials costs were $60,000. My best alternative was and is to go to work for a company in a job that would pay me $30,000. The "true" profits from my business were _____. A. $10,000 B. $30,000 C. $40,000 D. $90,000 E. $240,000

A. 10,000 My revenues are $100,000. My costs of generating those revenues are the payments for rent and materials ($60,000) and the $30,000 that I could earn in my best alternative job. Thus my "true" profit is the $100,000 minus $90,000.

A small clothing firm currently produces 50,000 shirts and blouses per month. The costs of its factory, raw materials, and labor is $500,000 per month. If the company is to increase production by 5,000 and that requires an additional labor and raw material expense of $100,000, what is the best estimate of costs of the increased production? A. $100,000 B. $400,000 C. $500,000 D. $600,000

A. 100,000 The best estimate of costs is what one has to give up to increase production. In this case it is $100,000.

Why is it so difficult to ignore costs we have actually already paid? A. Because they are explicit and we actually handed over a check. B. Because we should not count them as costs. C Because they are not actually costs.

A. Because they are explicit and we actually handed over a check. Because we actually handed money to someone or wrote a check to someone.

Is tuition a part of the cost of deciding to go to college? A. Yes B. No C. Part of room and board may be part of the cost.

A. Yes It is part of the cost because we have to give that amount of money to the college if we go. And we don't have to give that amount up, if we decide not to go.

Is the money, you could have earned instead of going to college, part of the cost of going to college? A. Yes B. No C. A portion of it is

A. Yes Yes, it is because if that is what you would be doing instead of college, you are giving it up.

A classic movie about the end of the world showed a floating island on what was the Pacific Ocean. In the middle of the movie filming, the set sank in a hurricane. The producers who had already spent $70 million on the set were faced with a new cost of $50 million to rebuild the set. Expected additional costs continued to be $100 million. The expected revenues were $160 million. Should they have rebuilt the set and finished the movie? A. Yes. The set sank. What is it about sunk costs that you do not understand? B. No. the loss on the movie was $160 million minus $220 million, a loss of $60,000. C. One cannot tell. They may have thought that revenues would be higher. D. One cannot tell. They may have thought that costs from that point on might have been lower.

A. Yes. The set sank. What is it about sunk costs that you do not understand? Once the set sank, the costs of completing the movie were $50 plus $100 million. The expected revenues were $160 million. So the decision to complete the movie lowered the losses from $ 70 million if they had stopped to $60 million if they completed the filming.

Finally, consider perhaps the most difficult concept connected to opportunity cost. Suppose that you have purchased the ticket for $50. There is no scalping market. (People can buy tickets at the box office and it is illegal to buy or sell tickets from or to anyone else.) Also, suppose that the box office will not refund the ticket price once the ticket has been purchased. What is your opportunity cost of attending the concert in this case? A. Zero, plus what I would have done with my time. B. $50, plus what I would have done with my time. C. $120, plus what I would have done with my time. D. None of the above

A. Zero, plus what I would have done with my time. The correct answer is that even though I paid $50 for the ticket, it has no value now beyond getting me into the concert. Thus, the cost of going to the concert at this point is zero, plus what I would have done with my time. I cannot get my money back; I cannot sell it to someone else. (Let's just assume that I am not allowed to give it to someone. If I could, there might be some benefit in doing so.) The idea is that the amount you originally paid is now irrelevant. What is relevant is what you are giving up at this time by going to the concert. The original payment is irrelevant. Whether you go to the concert or not will not affect that fact that you already paid the $50. The amount that you have already spent is a sunk cost. That amount is not affected by the choice you make now. It is sunk in that it is no longer available; it is gone; it is irrelevant to the current decision.

I am thinking about going out to visit with some friends tonight. Given what I have learned in economics, I am comparing my costs with my expected benefits. My alternatives in order of preference are to stay in my room and watch TV; stay in my room and study economics; have my friends over to my room; or go to bed early tonight. What are the costs relevant to my decision? A. The benefits gained from going out to visit some friends B. The benefits gained from staying in my room and watching TV C. The benefits gained from watching TV, studying economics, having my friends over, and going to bed early D. The benefits gained from one or two of the alternatives, but not all of them E. None of the above is correct

B. The benefits gained from staying in my room and watching TV I am giving up the best alternative, not all of the alternatives. And staying in my room and watching TV is the most valuable alternative.

Good economic decision-making means which of the following? A. Comparing all of the benefits with all of the costs related to the production and enjoyment of a good B. Thinking about marginal benefits and marginal costs of the good and services C .Thinking about average benefits and average costs of the goods and services

B. Thinking about marginal benefits and marginal costs of the good and services

Your college purchased a building east of campus for $500,000. Given changes in the city's real estate market, the current market value of the building is now $2 million. The total value of the use of the building for the college is estimated to be $1.5 million. What should your college do? Explain why. A. Not use the building. It would be a loss of $2 million. B. Use the building. The gain would be $1.5 million. C. Not use the building. Using the building would mean losing $ .5 million in doing so. D. Use the building. They only paid $500,000. It's value is $1.5 million. They gain $1 million.

C. Not use the building. Using the building would mean losing $ .5 million in doing so. If the college uses the building it will gain benefits of $1.5 million at a cost of $2 million. Not a good decision.

If a good or service is scarce, which of the following is true? A. There is a shortage at the going market price. B. Buyers cannot afford to purchase the product. C. We must give up something if we want more of the good. D. It is difficult to find the product in stores. E. Production is very rare.

C. We must give up something if we want more of the good

MB = MC Do you do more of it, less of it or change nothing?

Change nothing

Tickets to a sold-out basketball game originally cost $50 each and cannot be returned. I bought one and now scalpers are willing to pay $125 for the ticket. The cost that should be considered if I am deciding whether or not to go to the game is _____. A. 0 B. $50 C. $75 D. $125 E. $175

D. $125 The $50 is sunk. The $125 is the actual amount I will give up if I choose to go to the game.

Clear skies and clear rivers are scarce goods. True or false? A. True, we don't have enough of either one. B. False, we don't have to give up anything to them. C. False, only economic goods produced by workers and capital are scarce. D. Maybe, but only if they are in those areas of the world where we may have to give something else up in order to enjoy clear skies or clear rivers. E. They are gifts from nature, not economic goods.

D. Maybe, but only if they are in those areas of the world where we may have to give something else up in order to enjoy clear skies or clear rivers.

MB < MC Do you do more of it, less of it or change nothing?

Do less of it

MB > MC Do you do more of it, less of it or change nothing?

Do more of it

A business has spent $50 million dollars on development of a new laptop. It must spend an additional $20 million to bring the finished computer to market. What must the value of the investment be for it to make sense for the business? A. Any amount over $20 million. B. Any amount over $50 million. C. Any amount over $70 million. D. The value, if any, of the results of the $50 million spent so far. E. The value, if any, of the results of the $50 million spent so far, plus the $20 million.

E. The value, if any, of the results of the $50 million spent so far, plus the $20 million. The remaining required expenditure of $20 million is the easiest part to see. But if I could use the results of the development to date in an alternative project, or sell those results to another company, then the value in the alternative project or the amount I could get from selling those results to someone else, should also be included. If I cannot sell the results of that development or use them in an alternative project, then they should not be included as part of the consideration of whether or not to continue.

Capital is ?

Factories, machines, tools in an economy.

Costs that do not changed as we make a decision.

Fixed Costs

Suppose that you are considering purchasing a ticket to go to a concert with some friends. What is your opportunity cost?

If the cost of the concert ticket is $50 and I would have spent those three hours working for $10 per hour, the opportunity cost of going to the concert is what I could have purchased for $80 (the $50 plus 3 hours times $10). That is what I am giving up.

Labor Force is?

Includes those that have a job and those that want a job but don't have one.

Economic Resources include what?

Labor, capital, and natural resources.

Methods through which buyers & sellers come together to determine the prices and amount of goods exchanged.

Markets

If you lived in part of a world where there was clean air and there was no air pollution.. would that be considered an economic good?

No, it would not be considered a economic good or scarce good because we do not have to give up anything for the clean air.

What is the opportunity cost of washing dishes every night for your family? Not just ½ hour; but what would you do with that time?

The opportunity cost of washing dishes for my family every night could be studying. Instead of using the 1/2 hour to wash dishes I could be studying for an exam.

Suppose that I already have purchased a ticket for $50 to a sold-out concert. I could turn it back into the box office and get a refund, or I could sell it for $120 on eBay or Craigslist to someone who does not have a ticket. What is my opportunity cost of attending the concert?

This is a much more difficult concept. You didn't pay $120, but in a very real sense that is what you are giving up to go to the concert now. That, in that very real sense, is the real cost of the ticket. The $120 is the opportunity cost (along with what you would have done with your time).

True or False: Sunk and fixed costs are irrelevant for rational decision-making.

True

Is clean air a scare good? Explain why?

Yes, clean air would be considered a scarce good in economic terms because we would have to be giving up several things in order to achieve it. For example, we must change how we make cars in order for the cars to not excrete excess pollution.

What is the opportunity cost of college? Determine whether the following costs are opportunity costs or not. 1. Tuition 2. Student fees 3. Transportation 4. Books 5. Salary 6. Insurance 7. Room and board

1-5 Opportunity Cost (This is what is given up by going to college.) 6-7 Not an Opportunity Cost

In question 1.32, what is the cost per shirt before the increase in production? Part of the information is repeated for you below. A small clothing firm currently produces 50,000 shirts and blouses per month. The costs of its factory, raw materials, and labor is $500,000 per month. If it is to increase production by 5,000, that requires an additional labor and raw material expense of $100,000. A. $5 B. $10 C. $20 D. $50 E. $100

B. $10.00 The cost is $500,000 divided by 50,000. That is, it is equal to $10.00.

Some friends and I are heading to a concert. We all have purchased $50 tickets. I just realized that I lost my ticket on the subway ride to the concert. I am confronted now with a decision of whether or not to buy a new ticket and go to the concert . Which of the following best describes that decision? A. Is the concert worth paying $100 to attend? B. Is the concert worth paying $50 to attend? C. Is the concert worth paying $150 to attend?

B. Is the concert worth paying $50 to attend? The lost ticket is a sunk cost. I cannot get it back. Thus, the cost of going is buying a $50 ticket (plus the value of the time I will spend).

You have purchased a Tennessee Titans ticket for $100. The ticket can be sold online for $80. What, if anything, is the sunk cost? A. The ticket B. $100 C. $80 D. $20

D. $20 Because if you take $100 - $80 = $20

Why is it so difficult to consider costs that we have not physically paid as part of the cost of the decision? A. Because they are not actually costs B. Because they will only be costs once they are paid. C. Because we have not directly paid someone.

C. Because we have not directly paid someone. These costs are implied. We gave a sum up instead of accepting payment. So, it is a real cost. We would have had that amount.

Which of the following does not represent an opportunity cost of attending college? A. Tuition paid B. Amount that one could have earned instead of going to college C .Food D. Books purchased at college

C. Food

Is the income you could earn after going to college part of the cost of going to college? A. A portion of it is B. Yes C. No

C. No That is one of the benefits. Not a cost.

In every economy, resources are limited, but wants are large and increasing. What is this condition called? A. The opportunity cost of resources B. The opportunity cost of wants C. Scarcity D. Marginal cost

C. Scarcity

The additional benefit from adding one more of something

Marginal Benefit

The additional cost from adding one more of something

Marginal Cost

What one gives up doing when making a choice. It is the value of the forgone opportunity - the one best alternative to the choice we make.

Opportunity Cost.

When our wants continually seem to be larger than what our economic resources are able to produce. This phenomenon is what economists call?

Scarcity

A cost that has been paid and cannot be recovered.

Sunk Costs

A company has invested $80 million in a project. They expect the project to cost $20 million more to finish and it will earn them $40 million in sales. Should the company finish the project?

Yes

Microeconomics is?

economists study markets, firms, buyers, sellers, and workers on an individual or "micro" basis.