ECO 1104 Lecture 1: 1104 ROUGH NOTES CH1

1. When economists speak of "marginal," they mean
a. Opportunity.
b. Scarcity.
c. Incremental.
d. Unimportant.

2. Managers undertake an investment only if
a. Marginal benefits of the investment are greater than zero.
b. Marginal costs of the investment are greater than marginal benefits of the investment.
c. Marginal benefits are greater than marginal costs.
d. Investment decisions do not depend on marginal analysis.

3. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly, and they cost $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs break down?
a. Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250.
b. Total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250.
c. Total variable cost is $5,000; total fixed cost is $14,250; total cost is $19,250.
d. Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250.

4. Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. Which of the following is true if marginal cost is constant?
a. FC = $100
b. FC = $200
c. FC = $300
d. FC = $400

5. A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare
a. The total benefits gained from the two factories to the total costs of running the two factories.
b. The incremental benefit expected from the second factory to the total costs of running the two factories.
c. The incremental benefit expected from the second factory to the cost of the second factory.
d. The total benefits gained from the two factories to the incremental costs of running the two factories.

6. A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1,500 per week. If the price of each unit is $12,
a. The MR of hiring the worker is $1,500.
b. The MC of hiring the worker is $1,200.
c. The firm should not hire the worker since MB < MC.
d. All the above

7. A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of $7 per hour is sufficient.
What is the marginal cost of the 13th worker?
a. $117
b. $9
c. $33
d. $84

8. If a firm's average cost is rising, then
a. Marginal cost is less than average cost.
b. Marginal cost is rising.
c. Marginal cost is greater than average cost.
d. The firm is making an economic profit.

9. After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you of committing the sunk-cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough sale. Which of the following suggests the sales representative may be right?
a. Most of the costs of drug development are sunk, not fixed.
b. Sales representatives are paid a sales commission on revenue, so they don't care about the costs of drug development.
c. Sales representatives don't worry that a low price today may make it more difficult for the company's other sales representatives to charge higher prices to their customers, tomorrow.
d. Sales representatives think only about one thing, sales.

10. A company is producing 15,000 units. At this output level, marginal revenue is $22, and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40.
What can we conclude from this information?
a. The company is making a loss.
b. The company needs to cut production.
c. The company needs to increase production.
d. Not enough information is provided.

1. (Law of Diminishing Marginal Utility) Some restaurants offer “all you can eat” meals. How is this practice related to diminishing marginal utility? What restrictions must the restaurant impose on the customer in order to make a profit? (Answers may vary)

2. (Marginal Utility) Is it possible for marginal utility to be negative while total utility is positive? If yes, under what circumstances is it possible?

3. (Role of Time in Demand) In many amusement parks, you pay an admission fee to the park but you do not need to pay for individual rides. How do people choose which rides to go on? (Answers may vary)

4. What is the diamonds-water paradox, and how is it explained? Use the same reasoning to explain why bottled water costs so much more than tap water.

5. Please read Jane Katz’s “The Joy of Consumption: We Are What We Buy,” in the Federal Reserve Bank of Boston’sRegional Review at http://www.bos.frb.org/economic/nerr/rr1997/winter/katz97_1.htm and briefly discuss/summarize the evidence that Katz cites about how the rising value of time has affected consumer spending patterns.

6. Suppose that marginal utility of Good X = 100, the price of X is $10 per unit, and the price of Y is $5. Assuming that the consumer is in equilibrium and is consuming both X and Y, what must the marginal utility of Y be? (Hint: Please apply the formula: MUx/Px = MUy/Py)

7. What is consumer surplus? What happens to consumer surplus as price level falls?

8. Do you think any good which does not exhibit the law of diminishing marginal utility?

1. You purchase a pizza oven that is expected to last 10 years for $15,000. How do you account for the economic cost of the oven?

A. The cost is the price of the oven minus any revenue made selling pizzas made in the oven.

B. Calculate the value of renting the oven to someone else and use that as your cost.

C. Amortize the cost over the 10-year life of the oven, resulting in a cost of $1,500 per year.

D. Expense the oven, taking a write-off for the entire price in the first year.

2. If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it, the sunk cost is

A. $0.

B. $93,750.

C. $31,250.

D. $125,000.

3. Which of the following is NOT a form of outsourcing?

A. paying your son to mow the lawn.

B. hiring an accountant to do your taxes.

C. taking a taxi to the airport.

D. replacing the windshield wipers on your car.

4. Why do many people choose to not read the manuals included with their new computer?

A. They perceive that learning by doing is more enjoyable than learning by reading.

B. They perceive that learning by doing decreases costs faster than learning by reading.

C. They perceive that learning by reading is not sophisticated.

D. They perceive that learning by doing is better than learning by reading.

5. When you have diminishing marginal returns to labor

A. variable costs fall as more output is produced.

B. variable costs remain constant as more output is produced.

C. fixed costs rise as more output is produced because you have to buy more equipment to compensate.

D. variable costs rise as more output is produced.

6. A durable good is a product that

A. is usable over a long period of time.

B. holds up well under abuse.

C. has had the same design over a long period of time.

D. is purchased only once.

7. Isocost lines

A. represents the combinations of inputs that have the same total cost.

B. represents the combinations of inputs that have the same marginal cost.

C. represent supply and demand for inputs at a given cost.

D. are the inverse of the isoquant lines.

8. Why might a police officer not pull over someone speeding two miles over the speed limit?

A. The opportunity costs of stopping the driver are too low.

B. The explicit costs of stopping the driver over are too high.

C. The opportunity costs of stopping the driver are too high.

D. The explicit costs of stopping the driver are too low.