1. Economists consider which of the following costs to be irrelevant to a short-

Question

1. Economists consider which of the following costs to be irrelevant to a short-run business

a) opportunity cost, b) out-of-pocket cost, c) historical cost, d) replacement cost.

2. Economies of Scale are created by a greater efficiency of capital and by:

a) longer chains of command in management

b) better wages for labor

c) smaller plant sizes

d) increased specialization of labor

3. The distinction between sunk and incremental costs is most helpful in aswering which question?

a) how many more people should be added to the production process?

b) what is correct price to charge?

c) should we begin to build a new factory?

d) should we continue developing a new software application that we began last year?

4. The elasticity of demand for a product is likely to be greater

a) the smaller the number of substitute products available

b) the smaller the proportion of one's income spent on the product

c) the product is a luxury rather than an absolute necessity

d) if the product is an imported good rahter than a domestically produced good

5. For the given cost functions, find MC and ATC

a) ATC = $10 & MC = $(20,000/Q) + 10

b) MC = $10 & ATC = $(20,000/Q) + 10

c) ATC = $10,000 & MC = $10

d) None of the above

6. The Cross-Price-Elasticity of demand for Tylenol and Aleve is likely to be

a) greater than zero, b) less than zero, c) zero, d) infinity

Explanation / Answer

1. D) Replacement cost

Replacement costs are cost that are incurred after repeated usage of machinery over time. They wont be significant in short run business.

2. D

Economies of scale is something that can happen when production will increase dramatically and create large production. This can happen only with good capital investment and also skilled labor

3. D

The amount spent to develop software till now is the sunk cost. It must not affect your decision to go further or not, because if you do not finish it, It is as good as useless

4. C

If the product is luxury then you can expect demand to be elastic. The demand for premium gasoline decreases if the price of fuel increase

6. A

Medicines in general, they are price inelastic. This medicine in particular is depended on each other so the cross price elasticity is greater than zero

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