Question 1

Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight.The average cost per seat is
A)$50.
B)$500.
C)$50,000.
D)This cannot be determined from the information given.

Accepted Answer

The cost of flying a plane with 100 seats is $50,000. Therefore, the cost per seat would be $500 ($50,000/100). Since there are only 10 empty seats, the cost of the flight would not change significantly, and thus the average cost per seat would still be approximately $500. Therefore, the best choice is B.

Question 2

Acme Home Builders,Inc. ,has built 24 houses so far this year at a total cost to the company of $4.80 million.If the company builds a 25^th house,its total cost will increase to $5.05 million.Which of the following statements is correct? A)For the first 24 houses,the average cost per house was $205,000. B)The marginal cost of the 25^th house,if it is built,will equal $250,000. C)If the company can sell the 25^th house for at least $202,000,then it should build it. D)All of the above are correct.

Accepted Answer

The answer of Acme Home Builders,Inc. ,has built 24 houses...

Question 3

Katie is planning to sell her house,and she is considering making two upgrades to the house before listing it for sale.Replacing the carpeting will cost her $2,500 and replacing the roof will cost her $9,000.Katie expects the new carpeting to increase the value of her house by $3,000 and the new roof to increase the value of her house by $7,000.
A)She should make both improvements to her house.
B)She should replace the carpeting but not replace the roof.
C)She should replace the roof but not replace the carpeting.
D)She should not make either improvement to her house.

Accepted Answer

Replacing the carpeting results in a net gain of $500 ($3,000 increase - $2,500 cost), while replacing the roof results in a net loss of $2,000 ($7,000 increase - $9,000 cost).

Question 4

A barber currently cuts hair for 50 clients per week and earns a profit.He is considering expanding his operation in order to serve more clients.Should he expand?
A)Yes,because cutting hair is profitable.
B)No,because he may not be able to sell more services.
C)It depends on the marginal cost of serving more clients and the marginal revenue he will earn from serving more clients.
D)It depends on the average cost of serving more clients and the average revenue he will earn from serving more clients.

Accepted Answer

The decision to expand should be based on the marginal cost and marginal revenue. If the cost of serving additional clients is low compared to the additional revenue he will earn, then it would be profitable to expand. However, if the cost of serving additional clients is high and the additional revenue earned is not enough to cover the cost, then it would not be profitable to expand. Therefore, the best choice is C.

Question 5

It costs a furniture company $8,750 to produce 25 tables.The company's total cost will be $9,125 if it produces a 26^th table.If the company produces 26 tables,then A)its average cost is greater than its marginal cost. B)its average cost and its marginal cost are equal. C)its average cost is less than its marginal cost. D)This cannot be determined from the information given.

Accepted Answer

We can use the formula for average cost (AC) and marginal cost (MC):
AC = total cost / quantity produced
MC = change in total cost / change in quantity produced

From the information given, we can calculate the average cost of producing 25 tables:
AC = 8750 / 25 = 350

To produce 26 tables, the company's total cost will be $9,125:
9106 - 8750 = 375 (the cost of producing one extra table)

Therefore, the marginal cost of producing the 26th table is $375.

Since the average cost of producing 25 tables is $350 and the marginal cost of producing the 26th table is $375, we can conclude that the average cost is less than the marginal cost.

Therefore, the answer is C.

Question 6

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight.If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300,the airline should
A)sell the ticket because the marginal benefit exceeds the marginal cost.
B)sell the ticket because the marginal benefit exceeds the average cost.
C)not sell the ticket because the marginal benefit is less than the marginal cost.
D)not sell the ticket because the marginal benefit is less than the average cost.

Accepted Answer

The marginal benefit ($300) of selling the ticket to a standby passenger is greater than the marginal cost ($200) of flying one more passenger. Therefore, the airline should sell the ticket to the standby passenger.

Question 7

Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight.The marginal cost of flying a passenger is
A)$50.
B)$500.
C)$50,000.
D)This cannot be determined from the information given.

Accepted Answer

The marginal cost of flying a passenger cannot be determined from the information given because the cost of flying the plane is fixed at $50,000, regardless of the number of passengers on board.

Question 8

A rational decision maker takes an action if and only if
A)the average benefit of the action exceeds the average cost.
B)the average cost of the action exceeds the average benefit.
C)the marginal benefit of the action exceeds the marginal cost.
D)the marginal cost of the action exceeds the marginal benefit.

Accepted Answer

A rational decision maker will take an action if the marginal benefit exceeds the marginal cost, as this means that the additional benefit gained from taking the action is worth the additional cost incurred. Choices A and B refer to average benefits and costs, which can sometimes give misleading information if there are significant differences in the benefits and costs among individuals. Choice D is not correct as a decision maker will not take an action if the marginal cost exceeds the marginal benefit.

Question 9

A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million.If the company builds a 31^st house,its total cost will increase to $7.76 million.Which of the following statements is correct? A)For the first 30 houses,the average cost per house was $250,000. B)The marginal cost of the 31^st house,if it is built,will be $260,000. C)If the company can experience a marginal benefit of $275,000 by building the 31^st house,then the company should build it. D)All of the above are correct.

Accepted Answer

The average cost per house for the first 30 houses is $7.5 million / 30 = $250,000, so statement A is correct. The marginal cost of the 31st house is $7.76 million - $7.5 million = $260,000, so statement B is correct. If the marginal benefit of building the 31st house is $275,000, which is greater than the marginal cost of $260,000, the company should build it, making statement C correct. Therefore, all statements are correct.

Question 10

Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight.If the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night,the hotel manager should
A)rent the room because the marginal benefit exceeds the marginal cost.
B)rent the room because the marginal benefit exceeds the average cost.
C)not rent the room because the marginal benefit is less than the marginal cost.
D)not rent the room because the marginal benefit is less than the average cost.

Accepted Answer

The marginal benefit of renting a room is $60, which is higher than the marginal cost of operating one room for one night ($30). This means that the hotel manager should rent the room as the additional revenue generated from renting the room exceeds the additional cost incurred.

Question 11

Bill is restoring a car and has already spent $4000 on the restoration.He expects to be able to sell the car for $6200.Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to potential buyers.He could also sell the car now,without completing the additional work,for $3800.What should he do?
A)He should sell the car now for $3800.
B)He should keep the car since it wouldn't be rational to spend $6400 restoring a car and then sell it for only $6200.
C)He should complete the additional work and sell the car for $6200.
D)It does not matter if Bill sells the car now or completes the work and then sells it at the higher price because the outcome will be the same either way.

Accepted Answer

The answer of Bill is restoring a car and has...

Question 12

After much consideration,you have chosen Cancun over Ft.Lauderdale as your Spring Break destination this year.However,Spring Break is still months away,and you may reverse this decision.Which of the following events would prompt you to reverse this decision?
A)The marginal benefit of going to Cancun increases.
B)The marginal cost of going to Cancun decreases.
C)The marginal benefit of going to Ft.Lauderdale decreases.
D)The marginal cost of going to Ft.Lauderdale decreases.

Accepted Answer

A decrease in the marginal cost of going to Ft. Lauderdale would make it a more attractive option, potentially prompting a reversal of the decision to go to Cancun.

Question 13

Ashley eats two bananas during a particular day.The marginal benefit she enjoys from eating the second banana
A)can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.
B)determines Ashley's marginal cost of the first and second bananas.
C)does not depend on how many bananas Ashley has already eaten.
D)cannot be determined unless we know how much she paid for the bananas.

Accepted Answer

The marginal benefit of eating the second banana can be thought of as the additional benefit that Ashley receives from eating the second banana beyond the benefit she already received from eating the first banana. Therefore, it can be calculated as the total benefit of eating two bananas minus the total benefit of eating just one banana.

Question 14

The Get-There-Safe Bus company incurs an average cost of $45 for each passenger it carries on its trip from Atlanta to Chattanooga.In advance of a particular trip,four seats remain unsold.The bus company could increase its profit only if it
A)charged any ticket price above $0 for the four remaining seats.
B)charged at least $11.25 for each of the four remaining seats.
C)charged at least $45 for each of the four remaining seats.
D)paid four people to occupy the four remaining seats.

Accepted Answer

If the seats are unsold, they generate no revenue. Selling them at any price above $0 increases revenue without increasing costs, thus increasing profit.

Question 15

The marginal benefit Susie gets from purchasing a third pair of gloves is
A)the same as the total benefit she gets from purchasing three pairs of gloves.
B)more than the marginal cost of purchasing the third pair of gloves.
C)the total benefit she gets from purchasing three pairs of gloves minus the total benefit she gets from purchasing two pairs of gloves.
D)the total benefit she gets from purchasing four pairs of gloves minus the total benefit she gets from purchasing three pairs of gloves.

Accepted Answer

The marginal benefit of an additional unit is the increase in total benefit from consuming one more unit, which is the difference between the total benefit of three pairs and two pairs.

Question 16

Cole is refinishing an antique china cabinet and has already spent $180 on the restoration.He expects to be able to sell the cabinet for $360.Cole discovers that he needs to do an additional $200 worth of work to make the cabinet worth $360 to potential buyers.He could also sell the cabinet now,without completing the additional work,for $100.What should Cole do?
A)He should sell the cabinet now for $100.
B)He should keep the cabinet since it wouldn't be rational to spend $380 restoring a cabinet and then sell it for only $360.
C)He should complete the additional work and sell the cabinet for $360.
D)It does not matter which action he takes since the outcome will be the same either way.

Accepted Answer

If Cole completes the additional work and sells the cabinet for $360, he will have spent a total of $380 on the restoration, but will also be able to sell the cabinet for $360, resulting in a profit of $-20. Selling the cabinet now for $100 would result in a loss of $80, and keeping the cabinet without doing the additional work would also result in a loss of $20. Therefore, completing the additional work and selling the cabinet for $360 is the best option, as it results in the highest potential profit.

Question 17

Bridget drinks three sodas during a particular day.The marginal benefit she enjoys from drinking the third soda
A)can be thought of as the total benefit Bridget enjoys by drinking three sodas minus the total benefit she would have enjoyed by drinking just two sodas.
B)determines Bridget's willingness to pay for the third soda.
C)is likely different from the marginal benefit provided to Bridget by the second soda.
D)All of the above are correct.

Accepted Answer

A) is correct because the marginal benefit of the third soda is the additional benefit Bridget gets from drinking the third soda compared to the total benefit she received from drinking only two sodas.
B) is correct because the marginal benefit of the third soda determines the maximum amount of money Bridget is willing to pay for the third soda.
C) is correct because the marginal benefit of each additional soda is likely to decline as Bridget consumes more and more soda. Therefore, the marginal benefit of the third soda is likely different from the marginal benefit of the second soda.

Question 18

After much consideration,you have chosen Ireland over Spain for your Study Abroad program next year.However,the deadline for your final decision is still months away and you may reverse this decision.Which of the following events would prompt you to reverse this decision?
A)The marginal benefit of going to Spain increases.
B)The marginal cost of going to Spain increases.
C)The marginal benefit of going to Ireland increases.
D)The marginal cost of going to Ireland decreases.

Accepted Answer

If the marginal benefit of going to Spain increases, it may outweigh the benefits of going to Ireland, prompting a reversal of the decision.

Question 19

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight.The airline should sell a ticket to a standby passenger only if the passenger is willing to pay
A)more than $200.
B)more than $300.
C)more than $500.
D)This cannot be determined from the information given.

Accepted Answer

The answer of Suppose the cost of flying a 200-seat...

Question 20

Stephen is restoring a car and has already spent $4,000 on the restoration.He expects to be able to sell the car for $5800.Stephen discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers.He could also sell the car now,without completing the additional work,for $3,800.What should he do?
A)He should sell the car now for $3,800.
B)He should keep the car since it wouldn't be rational to spend $6,400 restoring a car and then sell it for only $5,800.
C)He should complete the additional work and sell the car for $5,800.
D)It does not matter which action he takes since the outcome will be the same either way.

Accepted Answer

If Stephen sells the car now for $3,800, he minimizes his loss to $200 ($4,000 - $3,800). If he spends an additional $2,400, his total cost will be $6,400, resulting in a $600 loss when selling for $5,800. Therefore, selling now is the better financial decision.

Quiz 1: Ten Principles of Economics: How People Make Decisions

Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight.The average cost per seat is

Acme Home Builders,Inc. ,has built 24 houses so far this year at a total cost to the company of $4.80 million.If the company builds a 25th house,its total cost will increase to $5.05 million.Which of the following statements is correct?

A barber currently cuts hair for 50 clients per week and earns a profit.He is considering expanding his operation in order to serve more clients.Should he expand?

It costs a furniture company $8,750 to produce 25 tables.The company's total cost will be $9,125 if it produces a 26th table.If the company produces 26 tables,then

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight.If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300,the airline should

Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight.The marginal cost of flying a passenger is

A rational decision maker takes an action if and only if

A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million.If the company builds a 31st house,its total cost will increase to $7.76 million.Which of the following statements is correct?

Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight.If the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night,the hotel manager should

After much consideration,you have chosen Cancun over Ft.Lauderdale as your Spring Break destination this year.However,Spring Break is still months away,and you may reverse this decision.Which of the following events would prompt you to reverse this decision?

Ashley eats two bananas during a particular day.The marginal benefit she enjoys from eating the second banana

The Get-There-Safe Bus company incurs an average cost of $45 for each passenger it carries on its trip from Atlanta to Chattanooga.In advance of a particular trip,four seats remain unsold.The bus company could increase its profit only if it

The marginal benefit Susie gets from purchasing a third pair of gloves is

Bridget drinks three sodas during a particular day.The marginal benefit she enjoys from drinking the third soda

After much consideration,you have chosen Ireland over Spain for your Study Abroad program next year.However,the deadline for your final decision is still months away and you may reverse this decision.Which of the following events would prompt you to reverse this decision?

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight.The airline should sell a ticket to a standby passenger only if the passenger is willing to pay

Acme Home Builders,Inc. ,has built 24 houses so far this year at a total cost to the company of $4.80 million.If the company builds a 25^th house,its total cost will increase to $5.05 million.Which of the following statements is correct?

It costs a furniture company $8,750 to produce 25 tables.The company's total cost will be $9,125 if it produces a 26^th table.If the company produces 26 tables,then

A construction company has built 30 houses so far this year at a total cost to the company of $7.5 million.If the company builds a 31^st house,its total cost will increase to $7.76 million.Which of the following statements is correct?