Question 1

Mark quit his job as a salesman where he made $43,000 per year to start his own t- shirt making business. His business expenses are $6,000 per year on rent, $12,000 per year on supplies, and $4,000 per year on part- time help. As for his personal expenses, his apartment costs him $4,800 per year and his personal bills are an extra $1,200 per year. Which of the following is not part of the opportunity cost of running his business?

Accepted Answer

The opportunity cost of running his business should only include the expenses that Mark gave up by quitting his job as a salesman. His personal bills and apartment costs are personal expenses that he would have paid regardless of his employment status. Therefore, they are not part of the opportunity cost of running his business.

Question 2

Suppose that your tuition to attend college is $5,000 per year and you spend $5,000 per year on room and board. If you were working full time, you could earn $22,000 per year. What is your opportunity cost of attending college?

Accepted Answer

The opportunity cost of attending college is the income you could have earned if you were not in college. In this case, if you were working full time, you could earn $22,000 per year. However, by attending college, you are giving up that income, plus the additional expenses of tuition and room and board. Therefore, your opportunity cost of attending college would be the $22,000 you could have earned plus the $5,000 for tuition and $5,000 for room and board, which equals $32,000. However, since you would still need to pay for room and board even if you were not in college, the true opportunity cost is $22,000 (income you could have earned) plus $5,000 (tuition), which equals $27,000.

Question 3

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions:
-According to the application, the weekly income earned in 2007 at that time could buy standard baskets of goods and services.

Accepted Answer

The application indicates that the real value of the minimum wage in 2007 could buy 1.16 standard baskets of goods and services, reflecting the decline in purchasing power over time.

Question 4

Firms expect to make money on repeat business because:

Accepted Answer

Firms expect to make money on repeat business because they believe that the exchange will benefit both the firm and their customers. They aim to satisfy their customers' needs and provide good customer service in order to maintain a strong relationship and encourage future business. This focus on creating mutual value and building trust is what drives repeat business, rather than a desire to take advantage of customers. Choice A is incorrect because having more power than customers is not an ethical or sustainable way to do business. Choice C is incorrect because not all firms are monopolists. Choice D is incorrect because tricking customers is not a sustainable or ethical business strategy.

Question 5

The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity is known as the:

Accepted Answer

The principle described in the question is the marginal principle, which states that individuals and firms will continue to engage in an activity until the marginal benefit equals the marginal cost. This is a key concept in economics and decision-making, as it helps individuals and firms maximize their overall utility and profitability. The other options listed, such as the principle of opportunity cost and principle of diminishing returns, are also important economic principles, but they are not directly related to the concept described in the question.

Question 6

Suppose it costs a firm $200 million to produce and promote a sequel. If the firm follows the marginal principle and decides not to produce the movie, which of the following must be true?

Accepted Answer

The firm decides not to produce the movie because it believes the marginal benefit is less than the marginal cost of $200 million, not billion.

Question 7

If real salaries decrease but nominal salaries do not, this means that:

Accepted Answer

When real salaries decrease but nominal salaries do not, it means that there has been inflation. Inflation causes the prices of goods and services to rise, which reduces the purchasing power of money. Therefore, prices have risen, leading to a decrease in the real value of salaries.

Question 8

Recall Application 5, "The Declining Real Minimum Wage," to answer the following questions:
-According to the application, if the nominal minimum wage is unchanged while prices rise, then the real minimum wage:

Accepted Answer

If prices rise while the nominal minimum wage stays the same, the purchasing power of the wage decreases and the real minimum wage declines.

Question 9

Recall Application 1, "Don't Forget the Costs of Time and Invested Funds," to answer the following questions.
-According to the application,if this year Betty spends $100,000 of her own money on materials, the interest rate is 5%, has living expenses of $20,000 and could have made $50,000 in her former line of employment, then Betty's opportunity cost of operating the business this year is:

Accepted Answer

The answer of Recall Application 1, "Don't Forget the Costs...

Question 10

The economic reason why some individuals choose keep their tuition money and not to go to school is:

Accepted Answer

This individual believes that the cost of tuition is higher than the potential value of the education they would receive, so they choose not to spend the money on school.

Question 11

The opportunity cost of going to college:

Accepted Answer

The opportunity cost of going to college includes wages that you lose by going to school instead of working. This is because you could have been earning money instead of going to college.

Question 12

-Refer to Table 2.4. The principle of diminishing returns sets in with the addition of the _ tank of fertilizer.

Accepted Answer

Table 2.4 shows that the first tank of fertilizer increased the yield from 30 to 50, the second tank increased it from 50 to 70, but the third tank only increased it from 70 to 80. This is an example of the principle of diminishing returns, where the marginal increase in output decreases with each additional unit of input. Therefore, the best choice would be the addition of the third tank of fertilizer, after which the additional yield is not significant enough to justify the cost of adding more fertilizer.

Question 13

-Julianne runs a business and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Julianne staying open 3 hours per day. If she is following the marginal principle, what must her marginal benefit be?

Accepted Answer

The answer of 
-Julianne runs a business and needs to...

Question 14

Figure 2.2
-Figure 2.2 presents a production possibilities curve for a country that can either produce highways or provide people with medical care in a given year. The opportunity cost of the third new highway built in a year is:

Accepted Answer

According to the production possibilities curve presented in Figure 2.2, to produce the third new highway in a year, the country must give up producing 50,000 units of medical care. This represents the opportunity cost of producing the third new highway. Therefore, the answer is C.

Question 15

The extra benefit resulting from a small increase in an activity is called the:

Accepted Answer

Marginal benefit is the additional benefit resulting from a small increase in an activity.

Question 16

The real value of money:

Accepted Answer

The real value of money reflects its purchasing power, which takes into account inflation and the cost of goods and services. Nominal value refers to the face value of money without considering these factors.

Question 17

What is the real value of money?

Accepted Answer

The real value of money is determined by the quantity of goods and services it can buy. The amount of money one has or its face value does not determine its real value as the value of money can fluctuate based on inflation and other economic factors. Compounded earnings in banks also do not determine the real value of money as it only applies to a limited amount of money and does not account for the overall value of money in the economy.

Question 18

Recall Application 6, "Repaying Student Loans," to answer the following questions:
-The application shows that high inflation results in fewer years to pay back student loans because:

Accepted Answer

The answer of Recall Application 6, "Repaying Student Loans," to...

Question 19

When two people engage in voluntary trade,

Accepted Answer

Voluntary trade, by definition, occurs because both parties expect to benefit from the exchange. Otherwise, they would not engage in the trade. Therefore, it is expected that both parties will receive some form of gain or benefit from the trade.

Question 20

Figure 2.1
-On the production possibilities curve in Figure 2.1 the opportunity costs of increasing agricultural production from 400 tons to 600 tons is:

Accepted Answer

The opportunity cost is the amount of manufacturing production that must be forgone to increase agricultural production from 400 to 600 tons. If the curve shows a decrease of 200 tons in manufacturing when agricultural production increases by 200 tons, then the opportunity cost is 200 tons of manufacturing.

Quiz 2: The Key Principles of Economics