Problem set for week 2

Question 1

1. One lesson of business:
   a. is tracing the consequences of a policy.
   b. promoting a policy change to eradicate inefficiencies.
   c. moving assets from lower to higher value uses, thereby creating wealth.
   d. None of the above

Answer 1

C

Question 2

2. A consumer values a car at $30,000 and a producer values the same car at $20,000. If
   the transaction is completed at $24,000, the transaction will generate:
   a. No surplus
   b. $4,000 worth of seller surplus and unknown amount of buyer surplus
   c. $6,000 worth of buyer surplus and $4,000 of seller surplus
   d. $6,000 worth of buyer surplus and unknown amount of seller surplus

Question 3

3. A creative entrepreneur is one who knows how to
   a. Run a business
   b. Escape the burden of taxes
   c. Profitably exploit money making opportunities
   d. All of the above

Answer 3

C

Question 4

4. Which of the following describes a firm?
   a. Purchases labor hours from workers
   b. Borrows capital from investors
   c. Combines labor and capital to create production, moving them from their
   low value use to high value use
   d. All of the above

Answer 4

D

Question 5

5. If company X is successfully outsourcing its production of T-shirts to China, it is
   a. Creating wealth by moving labor in China from lower value use to higher value
   use
   b. Should be stopped on economic grounds since it is destroying wealth
   c. Destroying wealth by acquiring cheaper labor from China
   d. Both A & C

Answer 5

A

Question 6

6. The government can
   a. Create wealth by not interfering in the markets in any way what so ever
   b. Not affect wealth in the markets
   c. Create wealth by enforcing property rights and contracts
   d. Create wealth by making choice decisions for the market

Answer 6

C

Question 7

7. Technological advancement creates unemployment in firms that shut down or labor that is laid
   off. Wealth in this case is
   a. Destroyed, since firms are shutting down and production of certain goods and services
   decreasing
   b. Created, since the dislocated labor and resources are absorbed by new firms created
   through the technological innovation, moving them to higher value use
   c. Destroyed, since technological progress is leading to higher unemployment
   d. None of the above

Answer 7

B

Question 8

8. Price ceilings are primarily intended to help
   a. No one
   b. Consumers
   c. Producers
   d. Government

Answer 8

B

Question 9

9. Rent controls
   a. are an example of price floors.
   b. are an example of price ceilings.
   c. destroy wealth by preventing the movement of apartments to higher-valued use.
   d. Both b and c

Answer 9

D

Question 10

10. Economic reasoning is based on the premise that:
    a. all decisions or actions are costless.
    b. only non-economic decisions or actions have a cost associated with them.
    c. only economic decisions or actions have a cost associated with them.
    d. all decisions and actions have a cost associated with them.

Answer 10

D

Question 11

11. Variable costs are
    a. costs that vary with output
    b. not important in decision making
    c. costs that do not vary with output
    d. equal to total costs

Answer 11

A

Question 12

12. A business incurs the following production costs: Labor $125/unit; Materials
    $45/unit and rent $250,000/month. If the firm produces 1,000,000 units a month, the
    total variable costs equal
    a. $125Million
    b. $45Million
    c. $1Million
    d. $170Million

Answer 12

D

Question 13

13. Firm X is producing 1000 units, selling them at $15 each. Variable costs are $3 per
    unit and the firm is making an accounting profit of $3000. What is the firm’s fixed costs?
    a. $9,000
    b. $10,000
    c. $11,000
    d. $12,000

Answer 13

A

Question 14

14. Scott used $4,000,000 from his savings account that paid an annual interest of 5% to
    purchase a hardware store. After one year, Scott sold the business for $4,100,000. His
    accounting profits is:
    a. $300,000
    b. $100,000
    c. $80,000
    d. $20,000

Answer 14

B

Question 15

15. Scott used $4,000,000 from his savings account that paid an annual interest of 5% to
    purchase a hardware store. After one year, Scott sold the business for $4,100,000. His
    economic profits is:
    a. $300,000
    b. $100,000
    c. -$100,000
    d. -$200,000

Answer 15

C

Question 16

16. The opportunity cost of an action:
    a. is equal to the marginal cost of an action
    b. is equal to explicit cost
    c. is equal to the cost of the next best alternative forgone
    d. is the total cost of an action

Answer 16

C

Question 17

17. You go to see a movie that you believe will turn out to be amazing. The ticket costs
    you $20. Once in the theatre you realise that the movie is awful. If you leave now, you
    can still catch your favourite TV show. What should you do?
    a. Stay and watch the movie since you paid $20 for it
    b. The ticket price is now a sunk cost, so ignore it and go home
    c. Stay and watch the movie since the opportunity cost of the movie is zero
    d. None of the above

Question 18

18. A manager invests $400,000 in a technology that should reduce the overall costs of
    production. The company manages to reduce their cost per unit from $2 to $1.85. After
    the investment has been made, the $400,000 investment is
    a. Considered sunk costs, not relevant in further decision making
    b. Considered sunk costs, but still relevant in further decision making
    c. Considered a loss
    d. Considered a profit

Answer 18

A

Question 19

19. A manager invests $20,000 in equipment that would help the company reduce it’s per
    unit costs from $15 to $12. He expects the equipment to be in use for the next seven
    years. After two years, he realises that if he outsourced the production, the unit cost
    would be $7 instead. At this point what should the owner of the business do?
    a. Charge the manager for the next five years of depreciation
    b. Write off the equipment as sunk cost and allow for outsourcing since it is cheaper
    c. Not allow for outsourcing since the equipment is good for another five years
    d. None of the above

Answer 19

B

Question 20

20. A hidden cost fallacy can be avoided
    a. by ignoring the opportunity costs to using a capital
    b. by ignoring the cost of capital
    c. by taking all capital costs into account including the cost of equity
    d. none of the above

Answer 20

C