This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: CHAPTER 7 The Cost of Production MULTIPLE CHOICE SECTION 7.1 easy 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? a. Fly Right. b. Fly by Night. c. Neither, the costs are identical. d. Neither, Fly by Night has lower costs at small output levels and Fly Right has lower costs at high output levels. moderate 2. 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? a. Yes. b. No. c. It depends on what the rate of inflation was between 1985 and 1992. d. It depends on what the rate of interest was. moderate 3. 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? a. Sell to ABC Corporation. b. Farm the land for another year and sell to XYZ Corporation. c. Accept either offer as they are equivalent. d. Reject both offers. easy 4. Which of the following statements is true regarding the differences between economic and accounting costs? a. Accounting costs include all implicit and explicit costs. b. Economic costs include implied costs only. c. Accountants consider only implicit costs when calculating costs. d. Accounting costs include only explicit costs. 223 CHAPTER 7 TEST BANK THE COST OF PRODUCTION SIXTH EDITION moderate 5. 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: a. is correct and shows a solid command of the nature of opportunity cost. b. 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. c. is incorrect because when the price of a stock falls, the law of demand states that he should buy more shares....
View Full Document
This note was uploaded on 08/07/2011 for the course ECON 105 taught by Professor Prof.eco during the Spring '11 term at Indian School of Business.
- Spring '11