Exam 9: Decision Making by Individuals and Firms

Scenario: Accounting and Economic Profit Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job that paid $60,000 per year and started Wang's Wicker Furniture Store.He rented a showroom for $15,000 for the year, purchased capital equipment that depreciates $5,000 each year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising.Instead of using the capital for his own business he could rent it to a rival firm and earn $5,000 a year, In his first year, his revenue was $150,000. (Scenario: Accounting and Economic Profit) The implicit cost of capital for Wang's Wicker Furniture Store is: A.$0. B.$2,000. C.$5,000. D.$50,000.

In cities, a mile of road lane may cost $30 million or more, while in rural areas a mile of road lane may cost only $5 million.This means there should be more road lanes in rural areas than in urban areas.

Pauli's Pizza offers the following prices: one slice for $2, two slices for $3.50, three slices for $4.50, four slices for $5.00.The marginal cost of the third slice to Hui is: A.$4.50. B.$10. C.$1. D.$2.

Sara spends $25 for an all-day ticket to an amusement park.After one ride, it begins to rain and she wishes she had never come.Since she has already paid for her ticket, she should stay at the amusement park until it closes or she has wasted her $25.

(Table: Marginal Analysis of Sweatshirt Production II) Look at the table Marginal Analysis of Sweatshirt Production II.Given the information provided, the optimal quantity of sweatshirts to produce is:

An "either-or" decision is a choice between two activities.

Scenario: Betty's Cookie Shop Betty runs a cookie shop where she sells cookies for $1 each.In order to run the business, she employs five people, each of whom worked a total of 500 hours last year; she paid them a wage of $10 per hour.Her costs of equipment and raw materials add up to $75,000.Her business ability is legendary, and other companies have offered to pay Betty $100,000 if she would come to work for them.She also knows she could sell her cookie shop for $150,000.The bank in town currently pays an annual interest rate of 3% on all funds deposited with it.Assume there is no capital depreciation at this point. (Scenario: Betty's Cookie Shop) Given the information provided, Betty's implicit costs are: A.her salary if she worked elsewhere and interest she forgoes. B.labor costs and equipment and raw materials costs. C.the revenue she receives from selling her cookies, labor costs, and equipment and raw materials costs. D.revenue she receives from selling her cookies and her labor costs.

The implicit cost of capital is: A.the expense associated with leasing machines. B.the expense associated with buying machines. C.the opportunity cost of capital used by a business. D.irrelevant for determining economic profit.

Sally must submit a form to enroll in her company's flexible medical benefits program.Although she has been employed over a year, she has yet to complete the form.Which type of irrational behavior does this represent? A.status quo bias B.mental accounting C.loss aversion D.risk aversion

Werner installs custom sound systems in cars.If he installs seven systems per day, his total costs are $300.If he installs eight systems per day, his total costs are $400.William will install eight sound systems per day only if the eighth customer is willing to pay at least: A.$300. B.$400. C.$100. D.$50.

Marginal analysis is relevant for: A.both "either-or" and "how much" decisions. B.only "either-or" decisions. C.only "how much" decisions. D.only those situations where the time value of money is involved.

To maximize total net benefit, consumers and firms evaluate each activity at the: A.average. B.top. C.margin. D.end.

(Table: Marginal Benefit of Sweatshirts) Look at the table Marginal Benefit of Sweatshirts.The marginal benefit of producing the fourth sweatshirt is: A.$58. B.$14. C.$13. D.$12.

Figure: The Marginal Benefit Curve (Figure: Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve.According to the marginal benefit curve, the total benefit of mowing four lawns is approximately: A.$25 B.$35 C.$80. D.$114.

Figure: The Marginal Cost Curve (Figure: The Marginal Cost Curve) Look at the figure The Marginal Cost Curve.According to the marginal cost curve, the approximate total cost of mowing seven lawns is: A.$175. B.$113. C.$50. D.$24.

Tara notices that studying for one hour after class increases her economics grade by 11 points.The second hour yields a 7-point gain, the third hour yields a 4-point gain, and the fourth hour yields only a 1-point gain.This means that the marginal of studying decreases with study hours. A.cost B.benefit C.opportunity cost D.time

The decision to give a birthday present to a friend is: A.an example of decision making using bounded rationality. B.an example of behavior based on risk aversion. C.a rational decision if the person giving the gift is concerned about the recipient's welfare. D.an irrational economic decision because it reduces the economic payoff of the tipper.

Businesses employ resources to use in the production and sale of a good or service.Accounting profit is typically used as a way of evaluating the success of a business, but economists argue that economic profit is more relevant to determining whether a business should continue to operate.What is the difference between these two measures of profit? Explain why accounting profit is usually greater than economic profit.

Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando.Sarah's husband, an economist, claims Sarah lost $43,002 running her pottery studio.This means her husband is claiming that she incurred ________ in costs. A.$86,004; implicit B.$43,002; implicit C.$43,002; explicit D.$86,004; explicit

Figure: The Marginal Benefit Curve (Figure: Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve.According to the marginal benefit curve, the total benefit of mowing six lawns is approximately: A.$19. B.$35. C.$154. D.$200.