Question 1

Jet fuel is a major operating expense of an airline. Consider two airlines: Luna hedged fuel at US$50 per barrel, while Solis buys fuel on the spot market. The current spot price is US$70 per barrel. How should the difference in fuel expense affect their pricing and capacity planning?

Accepted Answer

B

Question 2

Your family owns a piece of empty land near the city centre. What is the opportunity cost of holding the empty land?

Accepted Answer

The opportunity cost of holding the empty land is the income foregone from not using the land for its best possible purpose.

Question 3

Consider the investments in setting up a new fine dining restaurant. Which of the following expenses would be sunk costs?
(i) Construction and decoration of the dining and kitchen areas.
(ii) Kitchen utensils.
(iii) Furniture.
(iv) Dinner ware and cutlery.
(v) Website design.

Accepted Answer

Sunk costs are expenses that have already been incurred and cannot be recovered. Construction and decoration of the dining and kitchen areas (i) and website design (v) are examples of sunk costs because once these expenses are made, they cannot be recovered if the restaurant fails or changes business direction.

Question 4

Even after a company shuts its business, it may still have to pay pensions. Referring to the taxonomy of costs (Figure 6.1 in the text), how would you describe the cost of the pensions?

Accepted Answer

The cost of pensions is considered a sunk cost because it is a cost that has already been incurred and cannot be recovered, regardless of future actions. Even if the company shuts down, the obligation to pay pensions remains due to past employment agreements.

Question 5

Which of the following concepts explains the economies of scale in the software industry?

Accepted Answer

Economies of scale in the software industry are largely due to the high fixed costs associated with development. Once a software product is developed, the cost to produce additional units (copies) is relatively low, allowing companies to spread the initial development costs over many units, thereby reducing the average cost per unit.

Question 6

At the time of writing, the top three providers of exchange-traded funds in the United States were Blackrock, Vanguard, and State Street which accounted for almost 80% of the market. Which of the following concepts explains the market concentration?

Accepted Answer

Economies of scale explain the market concentration because as these firms grow larger, they can operate more efficiently, reducing the cost per unit of managing funds, which in turn can attract more investors and increase their market share.

Question 7

A newspaper and television station can share news produced by reporters. What concept of cost does this illustrate?

Accepted Answer

Joint cost is illustrated here because it refers to the costs that are incurred from producing multiple products or services where the costs cannot be separately attributed to each product or service. In this case, the news produced by reporters is shared between a newspaper and a television station, indicating that the cost of producing the news is a joint cost shared by both outlets.

Question 8

The cost of researching and developing a new drug are fixed with respect to the number of units produced. Luna Pharmaceutical would like to sell drugs to poor countries "at cost." Suppose that Luna is subject to the fixed cost fallacy and calculates the cost of the drugs as the average cost, which includes the average fixed cost. What is a consequence of the fallacy?

Accepted Answer

Luna Pharmaceutical, by including the average fixed cost in their calculation of "at cost" pricing, would spread the fixed costs over the units sold, leading to a higher price per unit as they attempt to recover the fixed costs with each sale. This results in over-pricing the drugs to poor countries, as the marginal cost (the cost of producing one additional unit) does not actually increase with each unit produced.

Question 9

Accounting statements do not report opportunity costs. Businesses in existence for longer time would have more assets that have appreciated in value. Explain why such businesses would be more likely to suffer from status quo bias.

Accepted Answer

The answer of Accounting statements do not report opportunity costs....

Question 10

Jet fuel is a major operating expense of an airline. Consider two airlines: Luna hedged fuel at US$50 per barrel, while Solis buys fuel on the spot market. The current spot price is US$70 per barrel. How should the difference in fuel expense affect their pricing and capacity planning?

Accepted Answer

The answer of Jet fuel is a major operating expense...

Question 11

Your family owns a piece of empty land near the city centre. What is the opportunity cost of holding the empty land?

Accepted Answer

The answer of Your family owns a piece of empty...

Question 12

Consider the investments in setting up a new fine dining restaurant. Which of the following expenses would be sunk costs?
 (i) Construction and decoration of the dining and kitchen areas.
 (ii) Kitchen utensils. 
(iii) Furniture. 
(iv) Dinner ware and cutlery. 
(v) Website design.

Accepted Answer

The answer of Consider the investments in setting up a...

Question 13

Even after a company shuts its business, it may still have to pay pensions. Referring to the taxonomy of costs (Figure 6.1 in the text), how would you describe the cost of the pensions?

Accepted Answer

The answer of Even after a company shuts its business,...

Question 14

Use the concepts of fixed and variable costs to explain the economies of scale in the software industry.

Accepted Answer

The answer of Use the concepts of fixed and variable...

Question 15

At the time of writing, the top three providers of exchange-traded funds in the United States were Blackrock, Vanguard, and State Street which accounted for almost 80% of the market. How does such concentration relate to economies of scale?

Accepted Answer

The answer of At the time of writing, the top...

Question 16

A newspaper and television station can share news produced by reporters. What concept of cost does this illustrate?

Accepted Answer

The answer of A newspaper and television station can share...

Question 17

Use the concepts of joint and specific costs to explain the economies of scope across the transportation of passengers and freight by rail.

Accepted Answer

The answer of Use the concepts of joint and specific...

Question 18

The cost of researching and developing a new drug are fixed with respect to the number of units produced. Luna Pharmaceutical would like to sell drugs to poor countries "at cost." Suppose that Luna is subject to the fixed cost fallacy. Explain why it would over-price the drugs.

Accepted Answer

The answer of The cost of researching and developing a...

Question 19

Businesses in existence for longer time would have more assets that have appreciated in value. Explain why such businesses would be more likely to suffer from status quo bias.

Accepted Answer

The answer of Businesses in existence for longer time would...

Quiz 6: Costs

Jet fuel is a major operating expense of an airline. Consider two airlines: Luna hedged fuel at US$50 per barrel, while Solis buys fuel on the spot market. The current spot price is US$70 per barrel. How should the difference in fuel expense affect their pricing and capacity planning?

Your family owns a piece of empty land near the city centre. What is the opportunity cost of holding the empty land?

Consider the investments in setting up a new fine dining restaurant. Which of the following expenses would be sunk costs? (i) Construction and decoration of the dining and kitchen areas. (ii) Kitchen utensils. (iii) Furniture. (iv) Dinner ware and cutlery. (v) Website design.

Even after a company shuts its business, it may still have to pay pensions. Referring to the taxonomy of costs (Figure 6.1 in the text) , how would you describe the cost of the pensions?

Which of the following concepts explains the economies of scale in the software industry?

At the time of writing, the top three providers of exchange-traded funds in the United States were Blackrock, Vanguard, and State Street which accounted for almost 80% of the market. Which of the following concepts explains the market concentration?

A newspaper and television station can share news produced by reporters. What concept of cost does this illustrate?

Accounting statements do not report opportunity costs. Businesses in existence for longer time would have more assets that have appreciated in value. Explain why such businesses would be more likely to suffer from status quo bias.

Jet fuel is a major operating expense of an airline. Consider two airlines: Luna hedged fuel at US$50 per barrel, while Solis buys fuel on the spot market. The current spot price is US$70 per barrel. How should the difference in fuel expense affect their pricing and capacity planning?

Your family owns a piece of empty land near the city centre. What is the opportunity cost of holding the empty land?

Consider the investments in setting up a new fine dining restaurant. Which of the following expenses would be sunk costs? (i) Construction and decoration of the dining and kitchen areas. (ii) Kitchen utensils. (iii) Furniture. (iv) Dinner ware and cutlery. (v) Website design.

Even after a company shuts its business, it may still have to pay pensions. Referring to the taxonomy of costs (Figure 6.1 in the text), how would you describe the cost of the pensions?

Use the concepts of fixed and variable costs to explain the economies of scale in the software industry.

At the time of writing, the top three providers of exchange-traded funds in the United States were Blackrock, Vanguard, and State Street which accounted for almost 80% of the market. How does such concentration relate to economies of scale?

A newspaper and television station can share news produced by reporters. What concept of cost does this illustrate?

Use the concepts of joint and specific costs to explain the economies of scope across the transportation of passengers and freight by rail.

The cost of researching and developing a new drug are fixed with respect to the number of units produced. Luna Pharmaceutical would like to sell drugs to poor countries "at cost." Suppose that Luna is subject to the fixed cost fallacy. Explain why it would over-price the drugs.

Businesses in existence for longer time would have more assets that have appreciated in value. Explain why such businesses would be more likely to suffer from status quo bias.