Question 1

​The opportunity cost of an action:

Accepted Answer

The opportunity cost of an action refers to the cost of the best alternative forgone when making a decision. Therefore, the correct answer is C, which states that opportunity cost is equal to the cost of the next best alternative forgone. A, B, and D are incorrect because they do not accurately describe what opportunity cost is.

Question 2

​The fixed-cost fallacy occurs when

Accepted Answer

The fixed-cost fallacy occurs when a firm considers sunk costs (which are irrelevant) and overhead or depreciation costs (which are fixed and not relevant for short-term decisions). Therefore, both option A (considering sunk costs) and option C (considering overhead or depreciation costs) are correct.

Question 3

​Economists argue that:

Accepted Answer

Economists believe that every decision has an opportunity cost, which is the value of the next-best alternative forgone. Accounting costs may only include explicit costs, while implicit costs are opportunity costs that are not reflected in the accounting records. Sunk costs are irrelevant to economic decision-making because they have already been incurred and cannot be recovered.

Question 4

​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 realizes that if he outsourced the production,the unit cost would be $7 instead.At this point what should the senior manager do?

Accepted Answer

The manager should write off the equipment as a sunk cost and allow for outsourcing since it is cheaper. Even though the manager has invested $20,000 in the equipment, the outsourcing option provides a cheaper per unit cost than using the equipment. Therefore, the manager should opt for outsourcing, and the equipment should be written off as a sunk cost.

Question 5

​Opportunity cost of an activity

Accepted Answer

Opportunity cost refers to the cost of foregone opportunity or alternative. It may include both monetary costs as well as the foregone income that could have been earned by pursuing an alternative activity. Therefore, option C is the correct choice. Option A is incorrect because accounting costs only consider the monetary expenses incurred for an activity. Option B is incorrect as opportunity cost may include monetary costs. Option D is also incorrect as opportunity cost cannot be known with certainty as it is based on assumptions and judgments about the alternatives.

Question 6

​After graduating from college,Jim had two choices.He can either move to Florida,from Philadelphia,where he can work as an analyst and earn $60,000 or he can stay in Philadelphia and work in a car dealership earning $59,000.His opportunity cost of moving to Florida includes

Accepted Answer

The opportunity cost of moving to Florida is the salary he would forego by not staying in Philadelphia, which is $59,000.

Question 7

​A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85.Later,a manager has an opportunity to outsource production to another company at a cost per unit of $1.75.If you are the manager,you

Accepted Answer

The $400,000 investment is a sunk cost, meaning it cannot be recovered and should not influence future decisions. Therefore, it should be ignored (choice A & C). However, the manager should still consider the new opportunity to outsource production at a lower cost per unit, as this will further reduce their overall production costs.

Question 8

​You go to see a movie that you believe would turn out to be amazing.The ticket costs you $20.Once in the theatre you realize that the movie is awful.If you leave now,you can still catch your favorite TV show.What should you do?

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In this case, the $20 spent on the ticket is a sunk cost because it cannot be recovered. Therefore, the best choice would be to ignore the sunk cost and make the decision based on the current situation, which is to leave the movie and watch the TV show.

Question 9

​People tend to eat more at all you can eat buffets than they would at any other restaurants.This is so because the cost of consuming an additional item at an all you can eat buffet is

Accepted Answer

The cost of consuming an additional item at an all-you-can-eat buffet is considered zero because patrons pay a fixed price for unlimited access to food, so each additional item consumed does not incur an additional cost.

Question 10

​A car dealership union negotiates a contract that dramatically increases all salesmen's salaries.If one of the salesman is thinking of changing careers to be a hardware salesman,his opportunity cost

Accepted Answer

The negotiated contract that dramatically increases all salesmen's salaries increases the opportunity cost of leaving the current job as a salesman. Therefore, the opportunity cost of becoming a hardware salesman would increase.

Question 11

​A firm wishes to shut down an office and fire 100 employees.The company will save $3000 per month per employee.It is estimated that each employee contributes $4,100 to the company.The firm rents office space for this group of employees at $1500.What should the company do?

Accepted Answer

If the firm fires the 100 employees, they will save $3000 per month per employee which equals $300,000. However, each employee contributes $4,100 to the company, which amounts to $410,000. Therefore, the company will lose $110,000 if they fire the employees.
Additionally, the firm must pay $1500 for the rent of the office space. Therefore, the net loss will be $111,500. 
On the other hand, keeping the employees generates a profit of $4,100 - $3,000 - $1,500 = $600 per employee per month. Therefore, the total profit generated by the 100 employees is $60,000 per month, which is a profit of $1085 per employee per month. Therefore, it is best for the company not to fire the employees and keep the office running.

Question 12

​Lucy can bake 200 cookies in an hour or watch her favorite tv show.If she chooses to watch her show,the cookies are an example of

Accepted Answer

If Lucy chooses to watch her favorite TV show, she incurs an opportunity cost of not being able to bake 200 cookies in that hour. Therefore, the cookies are an example of opportunity cost. The best choice depends on Lucy's preferences and priorities. If she values her free time and leisure activities more than baking cookies, then watching her favorite TV show would be the best choice. On the other hand, if she values productivity and wants to bake cookies for some purpose, then baking cookies would be the best choice for her.

Question 13

​You are at a restaurant deciding if you would like some dessert after the meal.The dinner is over so you do not want anything else but the dessert.The opportunity cost of getting the dessert would include

Accepted Answer

The opportunity cost of a decision is the value of the next best alternative that you give up. In this case, choosing to spend money on dessert means you are foregoing the opportunity to spend that money on anything else, making C the correct answer.

Question 14

You are at an all-you-can-eat-buffet.You feel almost full.However they just brought out your favorite dessert and you can either choose to eat that or a helping of tapioca pudding.If you choose the cupcakes,the pudding would be your

Accepted Answer

The opportunity cost is the value of the best alternative forgone in making a decision. In this scenario, the opportunity cost of choosing the cupcakes is the tapioca pudding. Therefore, the best choice would be to weigh the satisfaction obtained from each dessert and choose accordingly, considering the opportunity cost.

Question 15

​You and two partners start a company.However,your partners play no role in running the company.You spend all your time managing the business.The time that you could have spent working for someone else and earning wages instead of running the business is your:

Accepted Answer

The cost of not working for someone else and earning wages instead of running the business is the opportunity cost, as it represents the opportunities foregone by choosing to run the business. Explicit cost refers to the cost of resources that are purchased or owned, marginal cost refers to the cost of producing an additional unit, and sunk cost refers to a cost that has already been incurred and cannot be recovered.

Question 16

​A manager invests $400,000 in a technology that should reduce the overall costs of production.The company managed to reduce their cost per unit from $2 to $1.85.After the investment has been made,the $400,000 investment is

Accepted Answer

The $400,000 investment is considered sunk costs as it has already been invested and cannot be recovered. It is not relevant in further decision making as the decision to invest has already been made and the focus should be on the actual cost reduction achieved by the technology. Therefore, choice A is the best one.

Question 17

​If a firm is earning negative accounting profits,it implies

Accepted Answer

Negative accounting profits indicate that the firm's expenses are exceeding its revenues, but it does not provide a complete picture of the firm's economic profits. Economic profits take into account not just explicit costs (as captured in accounting profits) but also implicit costs such as opportunity costs. Therefore, accounting profits alone cannot determine economic profits.

Question 18

​A hidden cost fallacy can be avoided

Accepted Answer

A hidden cost fallacy occurs when only some of the costs are considered, while others, such as the cost of capital or opportunity costs, are ignored. To avoid this fallacy, all capital costs should be taken into account, including the cost of equity. By doing so, a more accurate and comprehensive assessment of the true costs can be made. Therefore, option C is the best choice.

Question 19

​Wealthy professors are more likely to shop at high end stores with shorter wait times at the cashier than poor students because

Accepted Answer

The opportunity cost of waiting in a cashier line is the value of the next best alternative that is forgone as a result of choosing to wait in line. Wealthy professors have a higher opportunity cost of waiting in the cashier line because they could be using their time to do something more valuable, such as working or conducting research. Therefore, they are more likely to shop at high-end stores with shorter wait times at the cashier.

Question 20

Sarah can bake 200 cookies in an hour or watch her favorite tv show.If she chooses to watch her show,her opportunity cost is

Accepted Answer

The opportunity cost of watching her favorite TV show instead of baking is the value of the next best alternative forgone, which in this case is the 200 cookies she could have baked in that hour.

Quiz 2: Benefits, Costs, and Decisions

​The opportunity cost of an action:

​The fixed-cost fallacy occurs when

​Economists argue that:

​Opportunity cost of an activity

​After graduating from college,Jim had two choices.He can either move to Florida,from Philadelphia,where he can work as an analyst and earn $60,000 or he can stay in Philadelphia and work in a car dealership earning $59,000.His opportunity cost of moving to Florida includes

​A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85.Later,a manager has an opportunity to outsource production to another company at a cost per unit of $1.75.If you are the manager,you

​You go to see a movie that you believe would turn out to be amazing.The ticket costs you $20.Once in the theatre you realize that the movie is awful.If you leave now,you can still catch your favorite TV show.What should you do?

​People tend to eat more at all you can eat buffets than they would at any other restaurants.This is so because the cost of consuming an additional item at an all you can eat buffet is

​A car dealership union negotiates a contract that dramatically increases all salesmen's salaries.If one of the salesman is thinking of changing careers to be a hardware salesman,his opportunity cost

​A firm wishes to shut down an office and fire 100 employees.The company will save $3000 per month per employee.It is estimated that each employee contributes $4,100 to the company.The firm rents office space for this group of employees at $1500.What should the company do?

​Lucy can bake 200 cookies in an hour or watch her favorite tv show.If she chooses to watch her show,the cookies are an example of

​You are at a restaurant deciding if you would like some dessert after the meal.The dinner is over so you do not want anything else but the dessert.The opportunity cost of getting the dessert would include

You are at an all-you-can-eat-buffet.You feel almost full.However they just brought out your favorite dessert and you can either choose to eat that or a helping of tapioca pudding.If you choose the cupcakes,the pudding would be your

​You and two partners start a company.However,your partners play no role in running the company.You spend all your time managing the business.The time that you could have spent working for someone else and earning wages instead of running the business is your:

​A manager invests $400,000 in a technology that should reduce the overall costs of production.The company managed to reduce their cost per unit from $2 to $1.85.After the investment has been made,the $400,000 investment is

​If a firm is earning negative accounting profits,it implies

​A hidden cost fallacy can be avoided

​Wealthy professors are more likely to shop at high end stores with shorter wait times at the cashier than poor students because

Sarah can bake 200 cookies in an hour or watch her favorite tv show.If she chooses to watch her show,her opportunity cost is

The opportunity cost of an action:

The fixed-cost fallacy occurs when

Economists argue that:

Opportunity cost of an activity

After graduating from college,Jim had two choices.He can either move to Florida,from Philadelphia,where he can work as an analyst and earn $60,000 or he can stay in Philadelphia and work in a car dealership earning $59,000.His opportunity cost of moving to Florida includes

A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85.Later,a manager has an opportunity to outsource production to another company at a cost per unit of $1.75.If you are the manager,you

You go to see a movie that you believe would turn out to be amazing.The ticket costs you $20.Once in the theatre you realize that the movie is awful.If you leave now,you can still catch your favorite TV show.What should you do?

People tend to eat more at all you can eat buffets than they would at any other restaurants.This is so because the cost of consuming an additional item at an all you can eat buffet is

A car dealership union negotiates a contract that dramatically increases all salesmen's salaries.If one of the salesman is thinking of changing careers to be a hardware salesman,his opportunity cost

A firm wishes to shut down an office and fire 100 employees.The company will save $3000 per month per employee.It is estimated that each employee contributes $4,100 to the company.The firm rents office space for this group of employees at $1500.What should the company do?

Lucy can bake 200 cookies in an hour or watch her favorite tv show.If she chooses to watch her show,the cookies are an example of

You are at a restaurant deciding if you would like some dessert after the meal.The dinner is over so you do not want anything else but the dessert.The opportunity cost of getting the dessert would include

You and two partners start a company.However,your partners play no role in running the company.You spend all your time managing the business.The time that you could have spent working for someone else and earning wages instead of running the business is your:

A manager invests $400,000 in a technology that should reduce the overall costs of production.The company managed to reduce their cost per unit from $2 to $1.85.After the investment has been made,the $400,000 investment is

If a firm is earning negative accounting profits,it implies

A hidden cost fallacy can be avoided

Wealthy professors are more likely to shop at high end stores with shorter wait times at the cashier than poor students because