Multiple Choice
1.
The
time value of money tells you that
a.
a
dollar received in the future is worth less than a dollar received today.
b.
a
given dollar amount today is equivalent to a smaller dollar amount in the
future.
c.
charging
interest on a loan is not fair.
d.
the
opportunity cost of loaning money is equal to the interest rate.
e.
the
opportunity cost should not always be considered when performing a cost-benefit
analysis.
2.
A
sunk cost is
a.
the
value of money sunk into an investment.
b.
beyond
recovery at the moment a decision must be made.
c.
important
to consider when conducting cost-benefit analysis.
d.
equal
to the opportunity cost when the interest rate is zero.
e.
the
same as a marginal cost.
3.
When
deciding whether to pursue an activity further, which of the following costs
are relevant?
a.
sunk
costs
b.
marginal
costs
c.
average
costs
d.
total
costs
e.
fixed
costs
4.
A
cost that does not vary with the level of activity is called a(n)
a.
average
cost
b.
marginal
cost
c.
sunk
cost
d.
variable
cost
e.
fixed
cost
5.
To
allocate resources efficiently across different activities, each unit of the
resource should be allocated to the activity in which its ___________ is
highest.
a.
marginal
cost
b.
average
cost
c.
marginal
benefit
d.
average
benefit
e.
total
benefit
6.
You
are currently registered (and have paid) to take 4 classes next semester. In which case is the cost of taking an
additional class a sunk cost?
a.
You
only need one more class to graduate.
b.
You
pay $250/hour for classes.
c.
The
cost of an additional class is $1000 regardless of the number of hours.
d.
You
pay $6000/semester for full time tuition (4 - 6 classes).
e.
You
plan to drop the class and receive a tuition refund.
7.
You
bought season tickets to football games at your university for $240. There are 6 home games during the season. After attending the first 5 games of the
season, you know that you absolutely hate going to football games. You are deciding whether to go to the game
or skip it. Your opportunity cost of
skipping the game is
a.
$0
b.
$40
c.
$48
d.
$240
e.
infinite
8.
You
have paid $10 to eat dinner at an all-you-can-eat buffet. You should continue eating until
a.
you
have finished eating "seconds."
b.
the
benefit you receive from additional food equals $10.
c.
you
have eaten all that you can.
d.
you
minimize the average cost of food.
e.
the
benefit from additional food equals 0.
9.
You
have just received a cash payment of $1,000.
You want to spend part of it, but need to save part of it for next
year's tuition payment. How much would
you have to put in a savings account today to have the $500 tuition payment a
year from now if the interest rate is 5%?
a.
471.43
b.
455.55
c.
476.19
d.
495
e.
500
10.
If
you loan a friend $1,000 for a year when you could have invested it and earned
15% interest for the year, what is the opportunity cost of making the loan?
a.
471.43
b.
455.55
c.
476.19
d.
495
e.
500
Problems/Short Answer
1.
Joining
the YMCA requires a $100 membership fee and $50 per month membership dues. Use this information to answer each of the
following questions.
a. The average cost per month of joining the
YMCA for 2 years.
b. The marginal cost of an additional month's
membership after 2 years.
c. If your reservation price for a 25th month's
membership is $54, should you continue your membership for a month after 2
years?
2.
You
decide to spend your spare time selling t-shirts with your college logo at
events on campus for a month. To do
this, you buy a machine for $250, 100 blank t-shirts (for $4.50 each) and 100
logos to put on the t-shirts (for $1.00 each).
Based on this information, answer each of the following.
a.
What
are your total costs, total fixed costs, total variable costs and average cost
per t-shirt?
b. If selling t-shirts for the month requires quitting your college
bookstore job (where you earn $500 per month), what is your opportunity cost of
selling t-shirts? How much would you
have to sell all your t-shirts for in a month for it to be an efficient choice?