BNAD 301 Test 2
According to the principle of sunk costs:
A person deciding whether to walk out of a movie should not take into account how much was
spent on the ticket.
If a businessman owns a 20-year-old building, which is expected to last 10 more years, then
what is the annual opportunity cost of using that building in his business?
The annual rent that he could currently earn from renting the building to someone else.
A bottling company paid $50,000 for a new machine to be installed on a new assembly line. If
the firm does not build the assembly line, then it has no other use for the machine. It can return
the machine to the manufacturer, but the manufacturer will pay only $30,000 for the returned
machine. In this situation, the opportunity cost of the machine is:
$30,000.
Suppose that a firm is considering a production process which would use the following
resources: $100 in parts already purchased that have no alternative use; $400 in parts already
purchased that could be resold for $300 if not used; $200 in parts not yet purchased. Which of
these values should be added together to determine the total opportunity cost of production
(check all that apply)?
200, 300
Suppose that a firm pays $100 for a resource, which can be sold back to the market for the
same price. If, over time, the market (and resale) price of the resource decreases to $60, then
that ______ the firm's opportunity cost of using that resource and ______ the firm's sunk cost
from the purchase of that resource.
Decreases, Increases
,Suppose that a firm pays $100 for a resource, which can be sold back to the market for the
same price. If, over time, the market price (and resale value) of the resource increases to $140,
then that ______ the firm's opportunity cost of using that resource and ______ the firm's sunk
cost from the purchase of that resource.
Increases, does not affect
Question 7 options:
Suppose that a bicycle firm bought $60,000 worth of special parts last year, planning to use
them in a new line of bikes this year. The parts would have cost $70,000 this year. Now,
however, the firm is less confident that the new line will be profitable, and it is trying to decide
whether to proceed on schedule or to cancel the project permanently. The bicycle firm has paid
a deposit of $10,000 for the parts, but it cannot walk away from the contract; it must pay the
other $50,000 and take delivery. Because of the custom design, the parts can be resold for only
$20,000. Alternatively, the bicycle firm could use them as substitutes for standard parts in its old
line of bikes, but the standard parts would cost only $40,000. Then the opportunity cost of using
the special parts as originally intended is $
40,000
Suppose that, for 2021, a frame shop projects revenue of $50,000 and costs of $30,000 for
materials. Of these materials, $20,000 have already been purchased and have no alternative
use, and $10,000 remain to be purchased. If the owner closes the shop and works in a similar
job for someone else, then she can earn $40,000 in 2021. Based on this information, the shop's
economic profits from operating in 2021 would be $
zero
An astrologer earns revenue of $4,000 per month and pays office rent of $1,000 per month. If
she quit her own business, she could work for a large firm of Wall Street astrologers for $3,500
per month. She has signed her lease through the end of 2018, and she cannot sublet. In this
situation, and based on the information given, she should:
Continue to operate her business through 2018, but switch to Wall Street in 2019.
If a business activity would generate a negative economic profit, then this means that:
More money can be made by investing the same resources elsewhere
Question 11 options:
Suppose that the Eats-A-Pizza Company owns the building that it uses and will have the
following revenues and costs if it stays open in 2021.Total revenue = $55,000Wages paid to
, employees = $40,000Original cost of supplies already bought that have no alternative use =
$20,000Rental value of building if rented to someone else = $10,000
Then the company's economic profits from operating in 2021 would be $ 5,000
Should the firm operate in 2021? YEs
What is required for free entry?I. New firms can enter the market without significant legal
obstacles.II. Every firm or new entrant in the market can achieve the same long run costs.
Both I and II.
In a competitive market with free entry, we expect to see entry by new sellers when:
Economic profits are positive.
Consider four firms, producing four different products. Any firm could produce any of the four
products (after making appropriate investments), because it is easy to learn how to make these
products. The four firms have different advantages. Firm A sells in the largest market Firm B has
the largest share of its market. Firm C produces in the market that is growing most rapidly. Firm
D has a secret process that cuts production costs, which others cannot duplicate. Which firm is
most likely to earn positive economic profits in the very long run
Firm D.
Merck (a large pharmaceutical company)
Has benefited from a patent barrier.
Starbucks
Operates in a market without significant barriers to entry.
Coca-Cola
Has benefited from a contract-based market access barrier.
Intel.
Has benefited from a technology-based cost barrier.
Boeing.
Has benefited from a technology-based cost barrier.
Suppose that, in a competitive market with free entry, every firm is making positive profits.
Then, as the market adjusts to its long run equilibrium, we expect the output produced by each
firm to ______ and total output to ______.
According to the principle of sunk costs:
A person deciding whether to walk out of a movie should not take into account how much was
spent on the ticket.
If a businessman owns a 20-year-old building, which is expected to last 10 more years, then
what is the annual opportunity cost of using that building in his business?
The annual rent that he could currently earn from renting the building to someone else.
A bottling company paid $50,000 for a new machine to be installed on a new assembly line. If
the firm does not build the assembly line, then it has no other use for the machine. It can return
the machine to the manufacturer, but the manufacturer will pay only $30,000 for the returned
machine. In this situation, the opportunity cost of the machine is:
$30,000.
Suppose that a firm is considering a production process which would use the following
resources: $100 in parts already purchased that have no alternative use; $400 in parts already
purchased that could be resold for $300 if not used; $200 in parts not yet purchased. Which of
these values should be added together to determine the total opportunity cost of production
(check all that apply)?
200, 300
Suppose that a firm pays $100 for a resource, which can be sold back to the market for the
same price. If, over time, the market (and resale) price of the resource decreases to $60, then
that ______ the firm's opportunity cost of using that resource and ______ the firm's sunk cost
from the purchase of that resource.
Decreases, Increases
,Suppose that a firm pays $100 for a resource, which can be sold back to the market for the
same price. If, over time, the market price (and resale value) of the resource increases to $140,
then that ______ the firm's opportunity cost of using that resource and ______ the firm's sunk
cost from the purchase of that resource.
Increases, does not affect
Question 7 options:
Suppose that a bicycle firm bought $60,000 worth of special parts last year, planning to use
them in a new line of bikes this year. The parts would have cost $70,000 this year. Now,
however, the firm is less confident that the new line will be profitable, and it is trying to decide
whether to proceed on schedule or to cancel the project permanently. The bicycle firm has paid
a deposit of $10,000 for the parts, but it cannot walk away from the contract; it must pay the
other $50,000 and take delivery. Because of the custom design, the parts can be resold for only
$20,000. Alternatively, the bicycle firm could use them as substitutes for standard parts in its old
line of bikes, but the standard parts would cost only $40,000. Then the opportunity cost of using
the special parts as originally intended is $
40,000
Suppose that, for 2021, a frame shop projects revenue of $50,000 and costs of $30,000 for
materials. Of these materials, $20,000 have already been purchased and have no alternative
use, and $10,000 remain to be purchased. If the owner closes the shop and works in a similar
job for someone else, then she can earn $40,000 in 2021. Based on this information, the shop's
economic profits from operating in 2021 would be $
zero
An astrologer earns revenue of $4,000 per month and pays office rent of $1,000 per month. If
she quit her own business, she could work for a large firm of Wall Street astrologers for $3,500
per month. She has signed her lease through the end of 2018, and she cannot sublet. In this
situation, and based on the information given, she should:
Continue to operate her business through 2018, but switch to Wall Street in 2019.
If a business activity would generate a negative economic profit, then this means that:
More money can be made by investing the same resources elsewhere
Question 11 options:
Suppose that the Eats-A-Pizza Company owns the building that it uses and will have the
following revenues and costs if it stays open in 2021.Total revenue = $55,000Wages paid to
, employees = $40,000Original cost of supplies already bought that have no alternative use =
$20,000Rental value of building if rented to someone else = $10,000
Then the company's economic profits from operating in 2021 would be $ 5,000
Should the firm operate in 2021? YEs
What is required for free entry?I. New firms can enter the market without significant legal
obstacles.II. Every firm or new entrant in the market can achieve the same long run costs.
Both I and II.
In a competitive market with free entry, we expect to see entry by new sellers when:
Economic profits are positive.
Consider four firms, producing four different products. Any firm could produce any of the four
products (after making appropriate investments), because it is easy to learn how to make these
products. The four firms have different advantages. Firm A sells in the largest market Firm B has
the largest share of its market. Firm C produces in the market that is growing most rapidly. Firm
D has a secret process that cuts production costs, which others cannot duplicate. Which firm is
most likely to earn positive economic profits in the very long run
Firm D.
Merck (a large pharmaceutical company)
Has benefited from a patent barrier.
Starbucks
Operates in a market without significant barriers to entry.
Coca-Cola
Has benefited from a contract-based market access barrier.
Intel.
Has benefited from a technology-based cost barrier.
Boeing.
Has benefited from a technology-based cost barrier.
Suppose that, in a competitive market with free entry, every firm is making positive profits.
Then, as the market adjusts to its long run equilibrium, we expect the output produced by each
firm to ______ and total output to ______.
