BNAD301-Entry, Opportunity and Sunk Cost, Economic Proft

According to the principle of sunk costs:

A person deciding whether to walk out of a movie should not take into account how much was spent on the ticket.

If a businessman owns a 20-year-old building, which is expected to last 10 more years, then what is the annual opportunity cost of using that building in his business?

The annual rent that he could currently earn from renting the building to someone else.

A bottling company paid $50,000 for a new machine to be installed on a new assembly line. If the firm does not build the assembly line, then it has no other use for the machine. It can return the machine to the manufacturer, but the manufacturer will pay only $30,000 for the returned machine. In this situation, the opportunity cost of the machine is:

$30,000.

Suppose that a firm is considering a production process which would use the following resources: $100 in parts already purchased that have no alternative use; $400 in parts already purchased that could be resold for $300 if not used; $200 in parts not yet purchased. Which of these values should be added together to determine the total opportunity cost of production (check all that apply)?

$200

$300

Suppose that a firm pays $100 for a resource, which can be sold back to the market for the same price. If, over time, the market price of the resource increases to $140, then that ______ the firm's opportunity cost of using that resource and ______ the firm's sunk cost from the purchase of that resource.

increases; does not affect

Suppose that a firm pays $100 for a resource, which can be sold back to the market for the same price. If, over time, the market price of the resource decreases to $60, then that ______ the firm's opportunity cost of using that resource and ______ the firm's sunk cost from the purchase of that resource.

decreases; increases

Suppose that a bicycle firm bought $60,000 worth of special parts last year, planning to use them in a new line of bikes this year. The parts would have cost $70,000 this year. Now, however, the firm is less confident that the new line will be profitable, and it is trying to decide whether to proceed on schedule or to cancel the project permanently. The bicycle firm has paid a deposit of $10,000 for the parts, but it cannot walk away from the contract; it must pay the other $50,000 and take delivery. Because of the custom design, the parts can be resold for only $20,000. Alternatively, the bicycle firm could use them as substitutes for standard parts in its old line of bikes, but the standard parts would cost only $40,000. Then the opportunity cost of using the special parts as originally intended is

$40000

The $60,000 purchase price is sunk, because it cannot be avoided (even if not all of it has been paid yet). The opportunity cost of using the parts is their value in the next best use. Two uses are described: the parts could be resold for $20,000, or they could replace other parts that would cost $40,000. The next best use would be to save $40,000 on other parts.

Suppose that, for 2021, a frame shop projects revenue of $50,000 and costs of $30,000 for materials. Of these materials, $20,000 have already been purchased and have no alternative use, and $10,000 remain to be purchased. If the owner closes the shop and works in a similar job for someone else, then she can earn $40,000 in 2021. Based on this information, the shop's economic profits from operating in 2021 would be

$10000

If the shop stays open, it has revenue of $50,000 and materials costs of $10,000 (the other $20,000 is sunk). The opportunity cost of the owner's labor is $40,000. Therefore, the economic profit is $50,000 - $10,000 - $40,000 = $0.

If a business activity would generate a negative economic profit, then this means that:

More money can be made by investing the same resources elsewhere.

Suppose that the Eats-A-Pizza Company owns the building that it uses and will have the following revenues and costs if it stays open in 2021. Total revenue = $55,000 Wages paid to employees = $40,000 Original cost of supplies already bought that have no alternative use = $20,000 Rental value of building if rented to someone else = $10,000Then the company's economic profits from operating in 2021 would be _____. Should the firm operate in 2021? _____

$5000;Yes

What is required for free entry?I. New firms can enter the market without significant legal obstacles.II. Every firm or new entrant in the market can achieve the same long run costs.

Both I and II.

Earlier in the course, we defined a competitive market. We later defined free entry into a market. Which statement is true?

A market can be competitive without having free entry, and it can have free entry without being competitive.

In a competitive market with free entry, we expect to see entry by new sellers when:

Economic profits are positive.

Consider four firms, producing four different products. Any firm could produce any of the four products (after making appropriate investments), because it is easy to learn how to make these products. The four firms have different advantages. Firm A sells in the largest market Firm B has the largest share of its market. Firm C produces in the market that is growing most rapidly. Firm D has a secret process that cuts production costs, which others cannot duplicate. Which firm is most likely to earn positive economic profits in the very long run?

Firm D.

Suppose that, in a competitive market with free entry, every firm is making positive profits. Then, as the market adjusts to its long run equilibrium, we expect the output produced by each firm to ______ and total output to ______.

Decrease; increase.

In the long run, in a competitive market with free entry, which of the statements I and II is true? I. Firms earn zero economic profits. II. Firms produce the quantity that minimizes their long run average costs.

Both I and II are true.

In a competitive market, with free entry, the long run:

Supply curve is horizontal.

The returns that an investor could earn from the best alternative investment are:

The opportunity cost of capital.

Suppose that all of the firms in an industry are incorporated and consistently earn a 2% return on stockholder's equity, but alternative investments (e.g. certificates of deposit) earn 4%. In this industry, the firms are earning ___________ economic profits, and we expect to see the industry ___________ in the long run.

negative; shrink.

If a firm earns "normal" profits, then its economic profits:

Are zero.