MBA701 EXAM QUESTIONS AND ANSWERS WITH COMPLETE
SOLUTIONS GRADED A++
Which of the following is an implicit cost to a firm that produces a good or
service?
Foregone interest of using money that could have been kept in a bank.
Jacqui decides to open her own business and earns $50,000 in accounting profit
the first year. When deciding to open her own business, she turned down three
separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is
Jacqui's economic profit from running her own business? [Economic Profit =
Total revenue - Total costs (including explicit and implicit costs)].
economic profit = 50,000 (the accounting profit, which is revenue - explicit cost) - 45,000
(the implicit cost) = $5,000.
Incentive plans imply ____.
if managers put forth little effort, they receive little pay; if they put forth much effort and
hence generate many sales and more profit, they receive a lot of pay.
If the interest rate is 10 percent and cash flows are $1,000 at the end of year one
and $2,000 at the end of year two, then the present value of these cash flows is
____. [For a stream of future values: PV = FV1/(1+i)1 + FV2/(1+i)2 + ... +
FVn/(1+i)n].
So, PV = 1,000/(1.10)1 + 2,000/(1.10)2 = $2,561.98.
,If the annual interest rate is 0 percent, the present value of receiving $210 in the
next year is ____. [PV = FV/(1+i)n].
PV = FV/(1+i)n. PV = 210/(1.00)1. You see in this example that the opportunity cost of
waiting (OCW), which is the foregone interest, is zero (since the interest rate is zero).
A farm must decide whether or not to purchase a new tractor. The tractor will
reduce costs by $2,000 in the first year, $2,500 in the second, and $3,000 in the
third and final year of usefulness. The tractor costs $9,000 today, while the above
cost savings will be realized at the end of each year. If the interest rate is 7
percent, what is the net present value of purchasing the tractor? [N(Q) = B(Q) -
C(Q)].
So, the net present value of the tractor = the present value of the benefits (saved costs)
- the costs (incurred today, and that it is also in present value) = 2,000/(1.07)1 +
2,500/(1.07)2 + 3,000/(1.07)3- 9,000 = -$2,498.35.
If marginal costs of producing an additional unit for a firm exceed marginal
benefits, then ____.
the firm should decrease its production level.
In order to maximize net benefits, the managerial control variable should be used
up to the point where ____.
net marginal benefits equal zero.
"Our marginal revenue is greater than our marginal cost at the current production
level." This statement indicates that the firm ____.
should increase the quantity produced to increase profits
, Control Variable
Total Benefits
Total Costs
Net Benefits
Marginal Benefit
Marginal Cost
Marginal Net Benefit
Q
B(Q)
C(Q)
N(Q)
MB(Q)
MC(Q)
MNB(Q)
0
0
0
0
-
-
-
1
900
SOLUTIONS GRADED A++
Which of the following is an implicit cost to a firm that produces a good or
service?
Foregone interest of using money that could have been kept in a bank.
Jacqui decides to open her own business and earns $50,000 in accounting profit
the first year. When deciding to open her own business, she turned down three
separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is
Jacqui's economic profit from running her own business? [Economic Profit =
Total revenue - Total costs (including explicit and implicit costs)].
economic profit = 50,000 (the accounting profit, which is revenue - explicit cost) - 45,000
(the implicit cost) = $5,000.
Incentive plans imply ____.
if managers put forth little effort, they receive little pay; if they put forth much effort and
hence generate many sales and more profit, they receive a lot of pay.
If the interest rate is 10 percent and cash flows are $1,000 at the end of year one
and $2,000 at the end of year two, then the present value of these cash flows is
____. [For a stream of future values: PV = FV1/(1+i)1 + FV2/(1+i)2 + ... +
FVn/(1+i)n].
So, PV = 1,000/(1.10)1 + 2,000/(1.10)2 = $2,561.98.
,If the annual interest rate is 0 percent, the present value of receiving $210 in the
next year is ____. [PV = FV/(1+i)n].
PV = FV/(1+i)n. PV = 210/(1.00)1. You see in this example that the opportunity cost of
waiting (OCW), which is the foregone interest, is zero (since the interest rate is zero).
A farm must decide whether or not to purchase a new tractor. The tractor will
reduce costs by $2,000 in the first year, $2,500 in the second, and $3,000 in the
third and final year of usefulness. The tractor costs $9,000 today, while the above
cost savings will be realized at the end of each year. If the interest rate is 7
percent, what is the net present value of purchasing the tractor? [N(Q) = B(Q) -
C(Q)].
So, the net present value of the tractor = the present value of the benefits (saved costs)
- the costs (incurred today, and that it is also in present value) = 2,000/(1.07)1 +
2,500/(1.07)2 + 3,000/(1.07)3- 9,000 = -$2,498.35.
If marginal costs of producing an additional unit for a firm exceed marginal
benefits, then ____.
the firm should decrease its production level.
In order to maximize net benefits, the managerial control variable should be used
up to the point where ____.
net marginal benefits equal zero.
"Our marginal revenue is greater than our marginal cost at the current production
level." This statement indicates that the firm ____.
should increase the quantity produced to increase profits
, Control Variable
Total Benefits
Total Costs
Net Benefits
Marginal Benefit
Marginal Cost
Marginal Net Benefit
Q
B(Q)
C(Q)
N(Q)
MB(Q)
MC(Q)
MNB(Q)
0
0
0
0
-
-
-
1
900
