1. Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs? Neither, the costs are identical.

1. In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land? Yes.

2. Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do?Sell to ABC Corporation.

3. Which of the following statements is true regarding the differences between economic and accounting costs? Accounting costs include only explicit costs.

4. 4. Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision: is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.

5. In order for a taxicab to be operated in New York City, it must have a medallion on its hood. Medallions are expensive, but can be resold, and are therefore an example of a fixed cost.

6. Prospective sunk costs are relevant to economic decision-making.

7. Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making?

I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition."

II. "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."

1. II only.

8. The difference between the economic and accounting costs of a firm are the opportunity costs of the factors of production that the firm owns

9. Consider the following statements when answering this question.

I. Increases in the rate of income tax decrease the opportunity cost of attending college.

II. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college.

1. I and II are both true.

10. Which of the following statements correctly uses the concept of opportunity cost in decision making?

I. "Because my secretary's time has already been paid for, my cost of taking on an additional project is lower than it otherwise would be."

II. "Since NASA is running under budget this year, the cost of another space shuttle launch is lower than it otherwise would be."

1. I and II are both false.

11. Fixed costs are fixed with respect to changes in

1. output.

12. Incremental cost is the same concept as ______________ cost.

1. marginal

13. Which of the following costs always declines as output increases?

1. average fixed cost

15. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost? 5Q

16. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the fixed cost? 200

17. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the marginal cost? 5

18. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost? 5 + (200/Q)

19. 19. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average fixed cost? none of the above

20. Carolyn knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information? Carolyn can determine all of the above costs given the information provided.

Scenario 1: The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced.

21. Refer to Scenario 1. The total cost to produce 100 cookies is $25.00

22. Refer to Scenario 1. The total cost to produce 50 cookies is $20

23. 23. Refer to Scenario 1. For 100 cookies, the average total cost is falling.

24. 24.Refer to Scenario 1. Which piece of information would NOT be helpful in calculating the marginal cost of the 75th unit of output? The firm's fixed cost.

25. 25. Use the following two statements to answer this question:

I. The average cost curve and the average variable cost curve reach their minima at the same level of output.

II The average cost curve and the marginal cost curve reach their minima at the same level of output.

Both I and II are false.

26. Use the following two statements to answer this question:

1. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output.

2. The marginal cost of a given level of output is the slope of the line that is tangent to the variable cost curve at that level of output.

Both I and II are true.