Economics Module 1

Question 1

*If a good or service is scarce, which of the following is true?

Answer 1

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

Question 2

*Clear skies and clear rivers are scarce goods. True or false?

Answer 2

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.

Question 2

*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?

Answer 2

Zero, plus what I would have done with my time.

Question 3

*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.

Answer 3

Not use the building. Using the building would mean losing $ .5 million in doing so.

Question 4

*Last year, you purchased land to build a retail store. You paid $20 million for the land, but you haven’t built a retail store on the land yet. 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 retail store on the land?

Answer 4

$8 million

Question 5

*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 _____.

Answer 5

$125

Question 6

*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 _____.

Answer 6

$10,000

Question 7

*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 are the minimal acceptable returns (after spending $50 million) for management to bring the new laptop to market?

Answer 7

Any amount over $20 million.

Question 8

*Is tuition a part of the cost of deciding to go to college?

Answer 8

Yes

Question 9

*Is room and board part of the cost of the decision to go to college?

Answer 9

Part of room and board may be part of the cost.

Question 10

*Is the income you could earn after going to college part of the cost of going to college?

Answer 10

No

Question 11

*Is the money you could have earned instead of going to college part of the cost of going to college?

Answer 11

yes

Question 12

*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?

Answer 12

yes

Question 13

*I am thinking about going out to visit 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 MOST relevant costs to my decision?

Answer 13

The benefits gained from staying in my room and watching TV

Question 14

*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?

Answer 14

Is the concert worth paying $50 to attend?

Question 15

*Why is it so difficult to ignore costs we have actually already paid?

Answer 15

Because they are explicit and we actually handed over a check.

Question 16

*Why is it so difficult to consider costs that we have not physically paid as part of the cost of the decision?

Answer 16

Because we have not directly paid someone.

Question 17

*Good economic decision-making means which of the following?

Answer 17

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

Question 18

*In every economy, resources are limited, but wants are large and increasing. What is this condition called?

Answer 18

scarcity

Question 19

*Which of the following does not represent an opportunity cost of attending college?

Answer 19

food

Question 20

*A small clothing firm currently produces 50,000 shirts and blouses per month. The costs of its factory, raw materials, and labor are $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?

Answer 20

$100,000

Question 21

*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 are $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. *

Answer 21

$10

Question 22

(EOC) Tonight I can either (1) go out to dinner and a movie, or (2) cook dinner for some friends, or (3) eat a hamburger at the baseball game. I prefer to do (1), then (2), and finally (3) if I can only do one. If these are my best choices and the dollar cost of each is the same, what would be the opportunity cost of my going out to dinner and a movie?

Answer 22

Cooking dinner for some friends

Question 23

(EOC) What is the opportunity cost of a small business investing $1 million in a new project that will pay back $1.5 million in one year? The firm’s goal is to end the year with the most assets possible.
Its other alternatives are:
I. Leave $1 million in a bank account and earn $50,000 in interest.
II. Invest $1 million in new equipment that will have a value of $1 million at the end of the year and have earned an additional $100,000 in profits during the year
What is the opportunity cost of the new project?

Answer 23

$1,100,000

Question 24

(EOC) Suppose your parents inherited your grandparents’ house. They decided to move into the house and sell your current house. They did so because the house was free. Good decision?

Answer 24

Unclear as it depends on the value of the current house relative to the value of the inherited house.

Question 25

(EOC) The opportunity cost of spending a night with friends is which of the following?

Answer 25

A, B, or C, but not all of them
a. The movie I could have seen

b. The several hours of sleep I could have had

c. The better grade I could have earned with more study

Question 26

(EOC) Which of the following is most likely a scarce good?

Answer 26

Clean air in a town with many polluting automobiles

Question 27

(EOC) If I have to drop out of college, it will cost me all of the tuition I have paid and the income I could have earned during those years while I was in college. True or false?

Answer 27

False. I did pay these costs, but they are sunk and thus not relevant to the decision.

Question 28

(EOC) If the benefits (correctly defined) of a doing something are greater than the costs (correctly defined) of doing whatever it is, what should one do?

Answer 28

Always do it

Question 29

(EOC) The making of the movie Waterworld cost a total of $180 million. It generated a total of $130 million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to rebuild the set. An additional $50 million was spent to finish the movie.
Should they have rebuilt the set and finished the movie?

Answer 29

Yes, it was rational.

Question 30

(EOC) The making of the movie Waterworld cost a total of $180 million. It generated a total of $130 million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to rebuild the set. An additional $50 million was spent to finish the movie.
The sunk cost, once the movie set sank, was _______.

Answer 30

$70 million

Question 31

(EOC) The making of the movie Waterworld cost a total of $180 million. It generated a total of $130 million in revenues. $70 million was spent and then the set sank. An additional $60 million was spent to rebuild the set. An additional $50 million was spent to finish the movie.
Losses for the producers of Waterworld, if they finished the movie would be _____. If they did not finish the movie, losses would be _____.

Answer 31

$50 million; $70 million.

Question 32

In economics, what do we mean by “physical capital”?

Answer 32

Factories, machines, and manufactured equipment that firms use in the production process.

Question 33

The word “marginal” means

Answer 33

additional.

Question 34

Maria has three choices of what to do for the next hour. She prefers to watch TV. Her next choice would be to go for a walk and her third preference would be to study. Maria watches TV. In this scenario, what is Maria’s opportunity cost?

Answer 34

Going for a walk.

Question 35

You’ve been waiting in line for a roller coaster ride at the amusement park for 60 minutes. You’re at the front of the line when you hear an announcement that the ride is broken and will take 30 minutes to repair. Upon hearing this announcement, what is your opportunity cost of continuing to stand in line to go on the ride?

Answer 35

The 30 minutes to wait for repairs.

Question 36

Grant started a business this year. He earned $200,000 in revenues and had $150,000 in business expenses. His other alternative would have been to go back to his old job, where he earned $70,000. Taking account of all of his costs, what are Grant’s “true” profits from his business?

Answer 36

-$20,000

Question 37

An individual should continue doing an activity as long as:

Answer 37

the marginal benefits are greater than the marginal costs.

Question 38

(slides) Is clean air a scarce good?

Answer 38

Yes, everywhere. It isvaluable and can be used up (e.g. polluted).

Question 39

(slides) Suppose I have won a new Tesla auto at a drawing. It is designed from the ground up to be the safest, most exhilarating sedan made. The model I have won is selling on the used car market for $115,000. What is the cost to me of driving this car?

Answer 39

Electricity, repairs, and $115,000.

Question 40

(slides) Which of the following should be counted as part of the cost of going to college?

Answer 40

The cost of a dorm room

Travel to college

Cost of books

The cost of food in the dorm

The amount of money I can earn after college

The amount of money I can earn instead of going to college

Tuition