ECO101H1 Lecture Notes - Sunk Costs, Marginal Cost, Marginal Utility

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Two key building blocks: opportunity cost, marginal analysis. Undertake activity if marginal (additional) benefit exceeds marginal(additional) cost. Insights: include all opportunity costs, ignore sunk costs. Definition: costs which are incurred whether or not action is taken. Insight: only relevant costs are those which can be avoided if action is not taken. Marginal benefit of attending sports event: (both jack and jill) 2) jill plans to buy on day of event. Subway breaks down on day of event, and jack and jill both face unexpected cost: for taxis. Jack should attend: mb = 100 mc=75 mb> mc [ticket price is a sunk cost for. Price (fixed cost) does not enter into the decision. Jill should not attend: mb = 100 mc= 75+50=125 mb

Related Questions

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.

Select all of the following that are best described as sunk costs.

A.The cost of an expensive pair of shoes that I want, but will likely never wear.

B.The non-refundable deposit made a month ago to hold your spot on a rafting trip.

C.The additional money you must pay if you actually go on the rafting trip.

D.The morning run that I miss out on so that I have time to go to Starbucks before class

Imagine Germany and Greece produce only beer and olives. Germany can produce at most 500 kegs of beer or 2000 jars of olives. Greece has fewer workers and a 4 day work week, but they can still produce at most either 100 kegs of beer or 1000 jars of olives. Which of the following is false.

A.Germany has the absolute advantage in producing olives.

B.Greece has the comparative advantage in producing olives.

C.Germany has the comparative advantage in producing beer.

D.Greece does not have a comparative advantage in beer or olives.

Economic thought suggests that when making a decision you should:

A.Compare the opportunity cost with the true economic cost and choose the lowest.

B.Compare the marginal benefit (MB) with the marginal cost (MC) and only do something if MB>MC for that choice.

C.Always buy the cheapest option.

D.Go for the option with lowest average cost relative to average benefit.

A point lying exactly on the production possibility frontier is:

A.an efficient point

B.a super-efficient point

C.a non-attainable point

D.an inefficient point

Which of the following is the best example of a ânormativeâ economic question?

A.What percentage of the wealth is owned by the wealthiest 1% of the US population?

B.Is the income distribution in the United States fair?

C.How much would the economy grow if a new oil pipeline was approved?

D.What will the employment impacts be from a new, higher, minimum wage?

You are on a cruise in the Caribbean Sea, which cost $1,000. On this particular day you have the choice between two activities, both of which would provide marginal mental benefits to your state of mind. The first is a scuba diving trip whose cost was included in the price of the cruise (you get to swim with a school of hammerheads). The second is a shopping spree on St. Thomas that would cost you $500. Which costs and benefits (select all that apply) should you consider when deciding which activity to undergo?

The marginal benefits of the scuba trip.

The $500 cost of the shopping trip.

The marginal benefits of the shopping trip.

The $1,000 cost of the cruise.

All of the above.

I have been asked to write an introduction to a presentation that we have to do as a group, my part is to write an introduction and present it! Case 2: Near-Empty Restaurants and Off-Season Miniature Golf on p. 287 With the understanding of fixed and variable costs and what those mean to a business in both the short run and the long run, address the following questions in your analysis: Why does it makes sense for an airline to offer discounted fares to students, senior citizens, or some other group, when those fares are lower than the average cost per passenger? Would it make sense to offer deeply discounted fares, such as a $59 ticket from Los Angeles to San Francisco, 1 hour before departure? Why? Does it make sense for a restaurant to offer early-bird specials and senior citizen discounts? Explain your answers in terms of the economic concepts of marginal revenue and marginal cost, as applicable

CASE 2 "

Near-Empty Restaurants and Off-Season Miniature Golf empty? Why you might h Have you ever walked into a restaurant for lunch and found it almost to stay open? It might seem that the revenue from so asked, do the restaurants even bother to possibly cover the cost of running the restaurant. customers could not in deciding whether to. open for lunch, a restaurant owner must keep in mind the distinction between fixed and variable costs. Many of a restaurant's costs the rent, kitchen equipment, tables, plates, silverware, and so on are fixed. Shutting down during lunch would not reduce these costs. In other words, these costs are sunk in the short run. When the owner is deciding whether to serve lunch, only the variable costs the price of the additional food, and the wages of the extra staff are relevant. The owner shuts down the restaurant at lunchtime only if the revenue from the few lunchtime customers fails to cover the restaurant's variable costs. An operator of a miniature golf course in a summer resort community faces a similar decision. Because revenue varies substantially from season to season, the firm must decide when to open and when to close. Once again, the fixed costs the costs of buying the land, and building the course is irrelevant in making this short-run decision. The miniature-golf course should be open for business unify during those times of the year when its revenue exceeds its variable costs."

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ECO101H1 Lecture Notes - Sunk Costs, Marginal Cost, Marginal Utility

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