Economics Online Quiz 1

Topics: Economics, Costs, Price Pages: 5 (1535 words) Published: October 27, 2012
ECON1210 Online Quiz #1 Solutions Q.01: The main incentive for business activity is: A) government subsidies. B) technological advancement. C) profit. D) government regulation. Ans) C Solution: Profit is the reward in monetary term that serves as the main incentive for business activity. Government subsidies, if available, may serve as an incentive for business activity but it will never be a main one. Technological advancement and government regulation are not incentives that will reward business activity. Q.02: The opportunity cost of winning a free ticket to the Super Bowl worth $950 and attending the game is: A) zero, since the ticket was free. B) priceless, if the person really loves football. C) $950, representing the lost market value of selling the ticket to somebody else. D) zero, if the person would rather go to the game than do anything else. Ans) C Solution: The correct answer is C. Although you obtained the ticket for free, as long as it is resale-able (which is implied in the question), the opportunity cost of attending the game equals the resale value of the ticket, which is $950. For answer B, it is incorrect as the opportunity cost of attending the game is not the value of the game itself, but the value we forgo if we attend the game. Answer D is not correct too. Opportunity cost is zero when there is no choice. However it is clear that we have a choice to resell the ticket rather than attending the game here.

Q.03: You are given a ticket to a Bob Dylan concert. The face value of the ticket is $50. You value attending the Bob Dylan concert at $40. You can sell the ticket to a friend for $10 and attend a U2 concert by getting a ticket priced at $60. The opportunity cost of attending the U2 concert is: A) $10. B) $90. C) $40. D) $50. Ans) B Solution: The price of the U2 concert ticket of $60 is part of the opportunity cost of attending the U2 concert as you have to pay for it (an explicit cost). The value of $40 forgone for attending the Bob Dylan concert is another part of the cost. It is the intrinsic value that you have to give up for not going to the concert (an implicit cost). However, you can be benefited by selling the Bob Dylan ticket to your friend for $10. Therefore, altogether the opportunity cost of attending the U2 concert equals $60+$40-$10 = $90. The face value of the ticket of $50 is not relevant here because the value cannot be realized. (i.e. you cannot resell the ticket for $50 so this value is meaningless. The realized $10 already replaces such face value.)When calculating opportunity cost, we have to consider which item is relevant in the question. Q.04: Cyrus wants to be an executive committee member of a student society in university. He is interested in Sociology Society, Psychology Society and Animation Society. He estimates that the experience and knowledge he can gain from these societies are $1000, $800 and $550 respectively. He also has to devote 8 hours, 7 hours and 10 hours every week respectively for the societies. Suppose he can work as a private tutor for $50 per hour, what is the opportunity cost of Cyrus to be the executive committee member of Sociology Society? Solution: First, we can compute the net gain from the participation in each society: Society Sociology Psychology Gain 1000 800 Hours 8 7 Lost Pay 8*50=400 7*50=350 Net gain 600 450






Then, we figure out that Psychology Society is the best alternative to Sociology (600>450>50). The cost of joining Sociology includes the lost pay plus the net gain we could have gotten from the best alternative. Lost pay = 400. Net gain from Psychology = 450. Thus, the total is 850. Q.05: T/F: Tommy is given $10 from his mother to buy a magazine. He is not allowed to buy anything else but the magazine. The opportunity cost of buying the magazine is $10. Ans) F Solution: We develop the idea of opportunity cost from choices. When resources are too limited to fulfill people’s wants,...
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