Deck 3: Balancing Benefits and Costs

Question 1

The cost associated with foregoing the opportunity to employ a resource in its best alternative use is called:

A) a sunk cost.
B) an opportunity cost.
C) a fixed cost.
D) total cost.

Answer 1

an opportunity cost.

Question 2

Refer to Table 3.1.Suppose that you have a house that you rent out.If you keep the lawn maintained,you can charge a higher monthly rent for the house.Suppose your hourly wage from your job at the mall is $10,what is the net benefit of spending 12 hours per week maintaining the lawn of the house?

A) $120
B) $210
C) $320
D) $330

Answer 2

$210

Question 3

Refer to Table 3.2,which shows some costs and benefits of having your car repaired.Suppose you use your car to deliver pizzas.If you earn $10 per hour delivering pizzas,what is the net benefit of 3 hours of car repairs?

A) $875
B) $1540
C) $905
D) There is not enough information to determine the net benefits.

Answer 3

$875

Question 4

Refer to Figure 3.1.If one of the graphs represents the total cost of an activity,which other graph best represents the marginal cost of the activity?

A) A
B) B
C) C
D) D

Question 5

Opportunity cost refers to:

A) the amount of dollars that have to be spent in order to employ a resource.
B) the cost of employing one more unit of a resource.
C) a cost that a decision maker has already incurred.
D) the cost associated with foregoing the opportunity to employ a resource in its best alternative use.

Question 6

Total benefits minus total cost equals:

A) gross benefit.
B) marginal benefit.
C) net benefit.
D) incremental benefit.

Question 7

Refer to Table 3.2,which shows some costs and benefits of having your car repaired.What is the marginal benefit of the 4^th hour spent on repairs?

A) $450
B) $375
C) $295
D) $920

Question 8

Refer to Table 3.2,which shows some costs and benefits of having your car repaired.Suppose you use your car to deliver pizzas.If your wage increases from $10 to $20 per hour,what happens to your best choice of hours to spend on car repairs?

A) It increases by 1 hour.
B) It decreases by 1 hour.
C) It doesn't change.
D) It decreases by 2 hours.

Question 9

Refer to Table 3.2,which shows some costs and benefits of having your car repaired.What is the marginal cost of the 5^th hour spent on repairs?

A) $360
B) $435
C) $510
D) $780

Question 10

Refer to Table 3.2,which shows some costs and benefits of having your car repaired.Suppose you use your car to deliver pizzas.If you earn $10 per hour delivering pizzas,what is your best choice of hours to spend on car repairs?

A) 2
B) 3
C) 4
D) 5

Question 11

Refer to Table 3.1.Suppose that you have a house that you rent out.If you keep the lawn maintained,you can charge a higher monthly rent for the house.Suppose your hourly wage from your job at a law firm is $25,how many hours per week should you spend maintaining the lawn?

A) 4
B) 8
C) 12
D) 16

Question 12

"If the cost of college tuition goes up,then fewer people will go to college." This statement:

A) is always true.
B) is true only if for some students the cost of college after the tuition increase exceeds the benefits of attending college.
C) would never be true.
D) ignores the opportunity costs of attending college.

Question 13

Refer to Table 3.1.Suppose that you have a house that you rent out.If you keep the lawn maintained,you can charge a higher monthly rent for the house.If your hourly wage rises from $25 to $35,what happens to the number of hours per week you spend maintaining the lawn?

A) They fall by 4 hours.
B) They fall by 8 hours.
C) They fall by 12 hours.
D) They don't change.

Question 14

Refer to Table 3.1.Suppose there is a monthly tax of $100 on the house that you rent.How does this affect the number of hours you spend mowing the lawn?

A) Less time would be spent mowing the lawn because the cost of mowing the lawn would increase.
B) Less time would be spent mowing the lawn because the benefit of mowing the lawn would decreases.
C) More time would be spent mowing the lawn because the net benefits of mowing the lawn would increase.
D) There would be no change in the amount of time spent mowing the lawn.

Question 15

An economic explanation as to why individuals such as Bill Gates and LeBron James don't finish college is that:

A) the sunk cost of college is very high for them.
B) the opportunity cost of college is very high for them.
C) the benefits of additional college exceed the costs of additional college for them.
D) the decision not to finish college is irrational.

Question 16

Refer to Table 3.2,which shows some costs and benefits of having your car repaired.Suppose your mechanic charges a non-refundable fee of $100 just for scheduling an appointment.What happens to the best choice of hours to spend on car repairs?

A) It increases by 1 hour.
B) It decreases by 1 hour.
C) It doesn't change.
D) It decreases by 2 hours.

Question 17

Refer to Figure 3.1.Which graph best represents the total cost of an activity?

A) A
B) B
C) C
D) D

Question 18

Refer to Figure 3.1.Which graph best represents the total benefit of an activity?

A) A
B) B
C) C
D) D

Question 19

Suppose that adding a new disc drive to your computer increases its value by $100.The disc drive costs $75 and takes you 2 hours to install.If you value your time at $6 per hour then the net benefit of installing the disc drive is:

A) $13.
B) $19.
C) $25.
D) $88.

Question 20

Refer to Table 3.2,which shows some costs and benefits of having your car repaired.Suppose you use your car to deliver pizzas,for which you earn $10 per hour.If your mechanic lowers the amount she charges by $50,what happens to your best choice of hours to spend on car repairs?

A) It increases by 1 hour.
B) It decreases by 1 hour.
C) It doesn't change.
D) It decreases by 2 hours.

Question 21

When actions are finely divisible,the marginal benefit of action X is equal to:

A) the slope of a line that is tangent to the total benefit curve at X.
B) the slope of a line from the origin to a point on the total benefit curve at X.
C) the marginal cost of X.
D) the inverse of the slope of the total benefit curve at point X.

Question 22

The marginal units of action choice X:

A) are the last ∆X units and tend to generate the greatest amount of marginal benefits.
B) are the last ∆X units and tend to generate the smallest amount of marginal costs.
C) are the initial ∆X units, where ∆X represents the change in the units of X.
D) are the last ∆X units, where ∆X is the smallest amount you can add or subtract.

Question 23

Figure 3.2 shows the total cost and total benefit curves for a professional guitarist.According to the graph,which of the following is the best number of hours the guitarist should spend practicing each day?

A) 3
B) 4
C) 6
D) 7

Question 24

If H represents the number of hours spent on an activity,then which of the following could represent a total benefit function?

A) 400H - 30H²
B) 400H + 30H²
C) -400H - 30H²
D) -400H + 30H²

Question 25

According to the No Marginal Improvement Principle,if X* is the best choice,then:

A) MB must be greater than MC at X*.
B) MB must be equal to MC at X*.
C) MB must be less than MC at X*.
D) MB must be greater than or equal to MC at X*.

Question 26

According to the No Marginal Improvement Principle,if X* is the best choice,then:

A) MB must be no greater than MC at X* or else a small increase in the activity would increase net benefits.
B) MB must be no greater than MC at X* or else a small decrease in the activity would increase net benefits.
C) MB must be no less than MC at X* or else a small increase in the activity would increase net benefits.
D) the difference between MB and MC must be as great as possible.

Question 27

The marginal cost of action choice X:

A) measures the additional cost of a small change in X.
B) tends to decrease as X increases.
C) measures the cost that a decision maker has already incurred by pursuing activity X.
D) is minimized at the best level of activity X.

Question 28

Suppose that the slope of a line tangent to the total cost curve at point X is equal to the slope of a line tangent to the total benefit curve at point X,then:

A) net benefit would be increased by reducing the amount of the activity.
B) net benefit would be decreased by reducing the amount of the activity.
C) net benefit would be increased by increasing the amount of the activity.
D) net benefit is maximized.

Question 29

Suppose that the slope of a line tangent to the total cost curve at point X is steeper than the slope of a line tangent to the total benefit curve at point X,then:

A) net benefit would be increased by reducing the amount of the activity.
B) net benefit would be decreased by reducing the amount of the activity.
C) net benefit would be increased by increasing the amount of the activity.
D) net benefit is maximized.

Question 30

The marginal benefit of an action:

A) equals the additional benefit produced by extra units of X and tends to decrease as X increases.
B) equals the additional benefit produced by the total units of X and tends to increase as X increases.
C) equals the additional benefit produced by the total units of X and tends to decrease as X increases.
D) equals the additional benefit produced by extra units of X and tends to increase as X increases.

Question 31

Suppose that the marginal benefit of an activity is less than the marginal cost,then:

A) the net benefit would be increased by reducing the amount of the activity.
B) the net benefit would be decreased by reducing the amount of the activity.
C) the net benefit would be increased by increasing the amount of the activity.
D) there can be no marginal improvement by changing the amount of the activity.

Question 32

Refer to Figure 3.4.What is the marginal cost of the 15^th hour spent on this activity?

A) $80
B) $5.33
C) $2.66
D) $4.00

Question 33

Suppose that you can hire a worker in one-hour increments.For hours of work up to 4,the total benefit of the worker (in dollars)is B(0)= 0,B(1)= 25,B(2)= 45,B(3)= 60,and B(4)= 70.What is the marginal benefit of the second hour of the worker's time?

A) $10
B) $20
C) $25
D) There is not enough information to answer the question.

Question 34

The No Marginal Improvement Principle tells us that,at the best choice:

A) the marginal benefit of the last unit must be at least as large as the marginal cost and the marginal benefit of the next unit must be no greater than the marginal cost.
B) marginal cost and marginal benefit of the last unit must always be equal.
C) the marginal benefit of the last unit must be at least as large as the marginal cost and the marginal benefit of the next unit must be greater than the marginal cost.
D) small changes in the level of an activity will always increase net benefit.

Question 35

Refer to Figure 3.1.If one of the graphs represents the total benefit of an activity,which other graph best represents the marginal benefit of the activity?

A) A
B) B
C) C
D) D

Question 36

Marginal benefits and marginal costs:

A) capture the way total benefits and total costs change as the amount of an activity changes just a little bit.
B) are constant, regardless of the amount of an activity that is pursued.
C) tend to increase as a decision maker does more of an activity.
D) tend to decrease as a decision maker does less of an activity.

Question 37

Figure 3.2 shows the total cost and total benefit curves for a professional guitarist.If the guitarist is currently practicing 1 hour per day,then:

A) she should practice more because net benefits would increase.
B) she should practice less because net benefits would decrease.
C) she should practice less because net benefits would increase.
D) she should practice more because net benefits would decrease.

Question 38

If C(X)represents the total cost of activity X,then which of the following expressions best represents the marginal cost of activity X?

A) C(X) - C(X - ∆X)
B) (C(X) - C(X - ∆X))/∆X
C) (C(X) - C(X - ∆X))/X
D) C(X - ∆X))/∆X

Question 39

Figure 3.2 shows the total cost and total benefit curves for a professional guitarist.If the guitarist is currently practicing 7 hours per day,then:

A) he should practice more because net benefits would increase.
B) he should practice less because net benefits would decrease.
C) he should practice less because net benefits would increase.
D) he should practice more because net benefits would decrease.

Question 40

If B(X)represents the total benefit of activity X,then which of the following expressions best represents the marginal benefit of activity X?

A) B(X) - B(X - ∆X)
B) (B(X) - B(X - ∆X))/∆X
C) (B(X) - B(X - ∆X))/X
D) B(X - ∆X))/∆X

Question 41

Suppose that you can schedule a worker for up to 4 hours per day.The total benefit and total cost functions are B(H)= 1,300H - 20H² and C(H)= 500H + 60H².The corresponding formulas for marginal benefit and marginal cost are MB(H)= 1,300 - 40H and MC(H)= 500 + 120H.For how many hours should you schedule the worker?

A) 11.25 hours
B) 2.5 hours
C) 5 hours
D) 0 hours

Question 42

A sunk cost:

A) causes a decision maker to choose to pursue less of an activity.
B) causes a decision maker to choose to pursue more of an activity.
C) increases the marginal cost of an activity.
D) has no effect on a decision maker's best choice.

Question 43

Suppose that you join a gym that charges a $250 membership fee.You also have to pay an additional $5 each time you go the gym.In this case,your sunk cost is:

A) $250.
B) dependent upon the number of time you go to the gym.
C) $5.
D) $250 plus $5 times every visit you make to the gym.

Question 44

A cost that is unavoidable regardless of the actions of a decision maker is called:

A) a sunk cost.
B) a marginal cost.
C) an opportunity cost.
D) an incremental cost.

Question 45

Suppose that you can hire your mechanic for up to six hours.The total benefit and total cost functions are B(H)= 300H - 20H² and C(H)= 55H + 60H².The corresponding formulas for marginal benefit and marginal cost are MB(H)= 300 - 40H and MC(H)= 55 + 120H.For how many hours should you hire your mechanic?

A) 1.53 hours
B) 0.65 hours
C) 6 hours
D) 0 hours

Question 46

Sunk costs:

A) can be ignored because they have no effect on marginal costs.
B) should be taken into consideration when choosing the best level of an activity.
C) should not be ignored because they lead to higher marginal costs.
D) can be ignored because they don't have to be paid by the decision maker.

Question 47

Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. The benefit of food is given by B(F) = 100√F, with MB(F) = 50/√F. The benefit of clothing is given by B(C) = 25C, with MB(C) = 25. How many units of food should the consumer buy?

A) 0
B) 2
C) 4
D) 6

Question 48

Suppose that you can schedule a worker for up to 10 hours per day.The total benefit and total cost functions are B(H)= 1200 × √H and C(H)= 200H.The corresponding formulas for marginal benefit and marginal cost are MB(H)= 600/√H and MC(H)= 200.How many hours should you schedule the worker?

A) 9 hours
B) 8 hours
C) 4 hours
D) 0 hours

Question 49

According to the No Marginal Improvement Principle for Boundary Choices,if X* is a best choice,then:

A) if only a marginal increase in the activity level is possible, the MB ≤ MC at X*.
B) if only a marginal increase in the activity level is possible, the MB ≥ MC at X*.
C) if only a marginal decrease in the activity level is possible, the MB ≤ MC at X*.
D) MB = MC at X*.

Question 50

If H represents the number of hours spent on an activity,then which of the following could represent a marginal cost function?

A) 100H - 20H²
B) 100H + 20H²
C) -100H - 20H²
D) -100H + 20H²

Question 51

Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. The benefit of food is given by B(F) = 100√F, with MB(F) = 50/√F. The benefit of clothing is given by B(C) = 25C, with MB(C) = 25. How many units of clothing should the consumer buy?

A) 0
B) 2
C) 4
D) 6

Question 52

Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. If B stands for benefits then "B(F) + B(C)" is the:

A) constraint.
B) objective function.
C) optimization problem.
D) sunk cost.

Question 53

A decision maker can always make the best choice by:

A) including sunk costs as part of marginal costs.
B) including sunk costs as part of total costs.
C) ignoring sunk costs.
D) subtracting sunk costs from total benefits.

Question 54

Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. If B stands for benefits then "F + C = 10" is the:

A) optimal solution.
B) objective function.
C) constraint.
D) first-order condition.

Question 55

Which of the following statements is true?

A) Neither sunk costs nor the sinking of a cost will affect a decision maker's best choice.
B) Both sunk costs and the sinking of a cost will affect a decision maker's best choice.
C) Sunk costs will affect a decision maker's best choice, but the sinking of a cost will not.
D) Sunk costs will not affect a decision maker's best choice, but the sinking of a cost will.

Question 56

An action at which it is possible to change the activity level in only one direction is called:

A) an interior action.
B) a boundary action.
C) a limited action.
D) a marginal action.

Question 57

An action at which it is possible to marginally increase or decrease an activity level is called:

A) an interior action.
B) a boundary action.
C) a marginal improvement action.
D) a marginal action.

Question 58

Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. This is an example of:

A) a constrained optimization problem.
B) a sunk cost.
C) a sinking cost.
D) the No Marginal Improvement Principle.

Question 59

According to the No Marginal Improvement Principle,if X* is the best choice then at X* it must always be true that:

A) either MB = MC or the activity X is not finely divisible.
B) either MB ≠ MC or the activity X is not finely divisible.
C) either MB < MC or MB > MC.
D) MB = MC.

Question 60

Suppose that you can schedule a worker for up to 4 hours per day.The total benefit and total cost functions are B(H)= 300H - 20H² and C(H)= 500H + 60H².The corresponding formulas for marginal benefit and marginal cost are MB(H)= 300 - 40H and MC(H)= 500 + 120H.For how many hours should you schedule the worker?

A) 1.25 hours
B) 0.8 hours
C) 4 hours
D) 0 hours

Question 61

Use cost benefit analysis to explain the decision whether or not to attend college.Why do some people choose not to attend college?

Question 62

A.How are marginal cost and marginal benefits related to total cost and total benefit curves? Illustrate your answer using carefully labeled diagrams.
B.Illustrate the optimal choice of an activity using both a total cost and total benefit curve diagram and a MC and MB curve diagram.

Question 63

Suppose that you can schedule a worker up to four hours per day.The benefit function is given by B(H)= 500H - 22.5H² and the cost function is given by C(H)= 100 + 15H².The corresponding marginal benefit and marginal cost functions are given by MB(H)= 500 - 45H and MC(H)= 100 + 30H.What is the best choice of hours for this worker?

Question 64

Based on the Figure 3.6,what is the optimal choice for hours spent on this activity?

A) 0
B) 8
C) There is no optimal choice.
D) There is not enough information to determine the optimal choice.

Question 65

What does it mean to "think at the margin"? How is thinking at the margin related to determining best choices?

Question 66

If MB grows smaller and MC grows larger as the activity level grows,then:

A) an interior action for which MB = MC is the best choice.
B) net benefit can be increased by increasing the action.
C) net benefit can be increased by decreasing the action.
D) there is no best choice.

Question 67

Explain why sunk costs are irrelevant to choosing the best amount of an activity.

Question 68

Based on the Figure 3.5,what is the optimal choice for hours spent on this activity?

A) 0
B) 8
C) There is no optimal choice.
D) There is not enough information to determine the optimal choice.

Question 69

How would a local government use marginal analysis to determine whether or not to undertake a new highway construction project?

Question 70

State and explain the No Marginal Improvement Principle (for finely divisible actions).