Module 3 (Suppliers & Cost)

Question 1

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?

A - Owners expect that revenue will not cover total costs.
B - The owners decided to go on a vacation to Florida.
C - Other mountains nearby have shut down for the season.
D - Owners expect that revenue earned won’t cover variable costs.

Answer 1

D - Owners expect that revenue earned won’t cover variable costs.

Question 2

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?

A - Variable costs fall to $3,200 per boat and fixed costs fall to $800 per boat
B - Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat
C - Variable costs are unchanged at $4,000 per boat and fixed costs are unchanged at $1,000 per boat
D - Variable costs rise to $5,000 per boat and fixed costs are unchanged at $1,000 per boat

Answer 2

B - Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat

Question 3

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?

A - Profit
B - Consumer surplus
C - Profit + consumer surplus

Answer 3

C - Profit + consumer surplus

Question 4

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?
A - $10,000
B - $11,500
C - $20,000
D - $21,500

Answer 4

C - $20,000

Question 5

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?
A - $10,000
B - $11,500
C - $20,000
D - $21,500

Answer 5

A - $10,000

Question 6

Which of the following firms would benefit most from having dominant market share on a national level?

A - A chain of bookstores that incurs fixed costs every time it opens a new store.
B - A law firm that faces large labor costs.
C - A fast food restaurant that incurs fixed costs to set up new locations, but low variable costs per customer.
D - 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.

Answer 6

D - 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.

Question 7

Which of the following conditions could cause an industry to have a small number of firms? Select all that apply.

1 - Low variable costs
2 - Network effects
3 - High customer willingness to pay
4 - Low opportunity costs of entering the industry
5 -  High fixed costs

Answer 7

2 - Network effects

5 - High fixed costs

Question 8

An entrepreneur has developed a method of manufacturing light bulbs that significantly reduces the costs of production.
The entrepreneur should enter the industry if:

1 - Its average cost per light bulb is less than existing manufacturers’ variable cost per light bulb.
2 - Its average cost per light bulb is less than existing manufacturers’ average cost per light bulb.
3 - Its variable cost per light bulb is less than existing manufacturers’ variable cost per light bulb.
4 - Its fixed cost per light bulb is less than existing manufacturers’ fixed cost per light bulb.

Answer 8

1 - Its average cost per light bulb is less than existing manufacturers’ variable cost per light bulb.

Question 9

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?

1 - Employees at Amazon do not value salary as much as employees at other companies.
2 - Employees at Amazon are less qualified than ones at other companies.
3 - Amazon has been able to lower some of its employees’ WTS for their labor.
4 - Amazon has a lower WTP for employees.

Answer 9

3 - Amazon has been able to lower some of its employees’ WTS for their labor.

Question 10

You 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?

1 - It remains unchanged because the cost of room, board, and tuition has not changed.
2 - It decreases because you now have more resources to afford college education.
3 - It increases because you are foregoing more money for college.
4 - It remains unchanged because the benefits of attending college have not changed.

Answer 10

3 - It increases because you are foregoing more money for college.

Question 11

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?
1 - To meet higher demand, the industry relies more on less cost efficient producers of corn.
2 - Higher fixed costs incurred in order to meet demand end up increasing the cost of production.
3 - Corn ethanol’s relative inefficiency as a fuel raises production costs for corn producers.
4 - The opportunity cost for supplying corn is higher than before.

Answer 11

1 - To meet higher demand, the industry relies more on less cost efficient producers of corn.

Question 12

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?

1 - A salaried clerk who has a two-year employment contract
2 - A cashier who is paid on an hourly basis
3 - A part-time student who works at a fashion boutique twice a week
4 - All of the above

Answer 12

1 - A salaried clerk who has a two-year employment contract

Question 13

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?
1 - No, the company should shut down to avoid further losses.
2 - Yes, if the additional customers would lower the average cost enough to make the firm profitable.
3 - No, since the company is losing money on each unit sold, a greater quantity would lower profits further.
4 - Yes, because more customers now will result in more profit in the future.

Answer 13

2 - Yes, if the additional customers would lower the average cost enough to make the firm profitable.

Question 14

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?
1 - 2/9
2 - 1/4
3 - 5/9
4 - 5/8

Answer 14

2 - 1/4

Question 15

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:
1 - $7
2 - $10
3 - $17
4 - $27

Answer 15

3 - $17

Question 16

A - 140,000 barrels
B - Between 140,000 and 220,000 barrels
C - 220,000 barrels
D - Between 220,000 and 320,000 barrels

Answer 16

C - 220,000 barrels

Question 17

An entrepreneur is considering starting a new business to produce and sell gourmet cookie dough. The entrepreneur estimates that 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?
A - 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.
B - 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.
C - 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.
D - 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.

Answer 17

B - 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.

Question 18

Which of the following represents an economic cost, but not an accounting cost, of building and running a summer resort? Select all that apply.
A - The wages paid to the workers hired to run the resort and tend to its guests.
B - The wages lost by the owner in pursuing his own venture, instead of working for an already established resort.
C - The cost of materials to build the main hotel, pools and guesthouses.
D - The money foregone by using the land on which the resort will stand, instead of selling it or using it for another venture.
E - The cost of hiring accountants to keep track of the company’s books.

Answer 18

B - The wages lost by the owner in pursuing his own venture, instead of working for an already established resort.
D - The money foregone by using the land on which the resort will stand, instead of selling it or using it for another venture.

Question 19

How do you calculate average total cost?

Answer 19

Total cost (Fixed cost + Variable cost) divided by the total volume of goods produced.

Question 20

Businesses with high fixed costs are often referred to as what?

Answer 20

Volume businesses
ex. Airlines, Cellphone networks

High fixed costs lead to a highminimum efficient scaleof operation for a firm. In other words, to produce efficiently, firms with high fixed costs need to spread those costs across a much higher output than firms with low fixed costs do.

Question 21

Which of the following regarding economies of scale is true?

A - Economies of scale can operate at the level of the individual firm or industry, but not on the local level.
B - Firms that benefit from economies of scale in production will continue to do so as they increase output.
C - Scale economies can be either positive or negative, or both, based on a firm’s size.
D - Firm size is the sole determinant of whether a business is able to decrease costs from scaling production.

Answer 21

C - Scale economies can be either positive or negative, or both, based on a firm’s size.

Question 22

When a firm lowers its average costs by increasing its output, we say it is benefiting from….

Answer 22

economies of scale.

That is, fixed costs make it more economically efficient for the firm to operate at a large scale.

Question 23

Which of the following developments will cause an increase in the value created by a firm? Select all that apply.

A - Employees at the firm are willing to take a pay cut to work for the company.
B - The company is able to increase the price of its main product without a significant decrease in sales.
C - Consumer preferences change and average WTP for the company’s products increases.
D - The company discovers a new production technology, allowing it to produce its products more efficiently.
E - The rate at which the company is taxed is decreased by the government.

Answer 23

A - Employees at the firm are willing to take a pay cut to work for the company.
C - Consumer preferences change and average WTP for the company’s products increases.

Question 24

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?

Answer 24

Profit + consumer surplus

The difference between WTP and price is consumer surplus, and the difference between price and cost is the profit.