MANAGERIAL ECONOMICS A PROBLEM
SOLVING APPROACH ( CHAPTER 3 )TEST
BANK QUESTIONS AND ANSWERS
LATEST UPDATE
Costs are associated with - ANSWER-decisions.
The opportunity cost of an alternative is the - ANSWER-profit you give
up to pursue it.
Consider all costs and benefits that vary with the consequences of a
decision and only costs and benefits that vary with the consequences
of a decision. These are the - ANSWER-relevant costs and relevant
benefits of a decision.
Fixed costs do not vary with - ANSWER-the amount of output.
Variable costs change - ANSWER-as output changes.
Decisions that change output change - ANSWER-only variable costs.
Accounting profits - ANSWER-profit as shown on a company's financial
statements
The biggest advantage of capitalism is - ANSWER-creating wealth by
letting a person follow his or her own self-interest
Wealth creating transactions are more likely to occur - ANSWER-With
private property rights, With contract enforcement
Taxes: - ANSWER-Impede the movement of assets to higher valued
uses
Reduce incentives to work
Decreases the number of wealth creating transactions
Relevant benefits/costs - ANSWER-all benefits/costs that vary with the
consequence of a decision
Accounting profit does not necessarily correspond to - ANSWEReconomic profit.
After graduating from college, Jim had three choices, listed in order of
preference: (1) Move to Florida from Philadelphia, (2) work in a car
dealership in Philadelphia, or (3) play soccer for a minor league in
Philadelphia. His opportunity cost of moving to Florida includes -
ANSWER-The income he could have earned at the car dealership
[correct; opportunity cost reflects the value of the best foregone
alternative, in this case the car dealership salary]
Economic Value Added helps firms to avoid the hidden-cost fallacy -
ANSWER-by taking all capital costs into account including the cost of
equity [correct; By taking all of the capital costs into account such as
the cost of equity, firms can better gauge their economic profit and the
opportunity costs associated with some of their current assets]
The fixed-cost fallacy occurs when - ANSWER-A firm considers
irrelevant costs
A firm considers overhead or depreciation costs to make short-run
decisions
[correct; The sunk or fixed cost fallacy occurs when costs (such as
depreciation and overhead) are considered even when they do not vary
with the consequences of the decision.
Mr. D's Barbeque of Pickwick, TN produces 10,000 dry-rubbed rib
slabs per year. Annually Mr. D's fixed costs are $50,000. The average
variable cost per slab is a constant $2. The average total cost per slab
then is - ANSWER-The answer is $7
FC $50,000
VC 10,000 slabs/ yr x $2/ slab = $20,000
TC $50,000 + $20,000 = $70,000
ATC $70,000/10,000 slabs = $7/ slab
All the following are examples of variable costs, except:
a. labor costs
b. cost of raw materials
c. accounting fees
d. electricity costs - ANSWER-Accounting fees [correct; accounting
fees are paid regardless of total output. They do not vary with the
amount that is produced]
The U.S. Government bought 112,000 acres of land in southeastern
Colorado in 1968 for $17,500,000. The cost of using this land today
exclusively for the reintroduction of the black-tailed prairie dog -
ANSWER-is equal to the market value of the land [correct; the cost of a
decision includes the cost of the best foregone option. In this case, this
is the amount the government could sell the land for if they did not use
if for prairie dog introduction]
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