Part 1

1. Wealth creating transactions are more likely to occur

a. With private property rights
b. With contract enforcement
c. With black markets
d. a and b

2. An example of price floor is

a. Minimum wages
b. Rent controls in New York
c. Both a and b
d. None of the above

3. A consumer values a car at $525,000 and a producer values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the sellers bottom line price is

a. $527,000
b. $523,800
c. $525,000
d. $500,000

1-1 Airline Delays

How will commercial airlines respond to the threat of new $27,500 fines for keeping passengers on the tarmac for more than 3 hours? What inefficiency will this create?

1-6 Price of Breast Reconstruction vs. Breast Augmentation

Two similar surgeries, breast reconstruction and breast augmentation, have different prices. Breast augmentation is cosmetic surgery not covered by health insurance. Patients who want the surgery must pay for it themselves. Breast reconstruction following breast removal due to cancer is covered by insurance. The price for one of the surgeries has increased by about 10% each year since 1995 while the other has increased by only 2%per year. Which of the surgeries has the lower inflation rate? Why?

Part 2

1. A business owner makes 1000 items a day. Each day he/she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the economic profit for the month equals:

a. $300,000
b. $60,000
c. $450,000
d. $240,000

2. Mr. D's Barbeque of Pickwick, TN produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then is

a. $7.
b. $2.
c. $5.
d. impossible to determine.

2-1 Concert Opportunity Cost

You were able to purchase two tickets to an upcoming concert for $100 apiece when the concert was first announced three months ago. Recently, you saw that StubHub was listing similar seats for $225 apiece. What does it cost you to attend the concert?

2-2 Housing Bubble

Due to the housing bubble, many houses are now selling for much less than their selling price just two to three years ago. There is evidence that homeowners with virtually identical houses tend to ask for more if they paid more for the house. What fallacy are they making?

Part 3

1. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs breakdown?

a. Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250
b. Total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250
c. Total variable cost is $5,000; total fixed cost is $14,250; total cost is $19.250
d. Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250

2. A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1500 per week. If the price of each unit is $12,

a. The MR of hiring the worker is $1500
b. The MC of hiring the worker is $1200
c. The firm should not hire the worker since MBd. All the above

3. A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire twelve workers, a wage rate of $7 per hour is sufficient. What is the marginal cost of the 13th worker?
a. $117.
b. $9.
c. $33.
d. $84.

4. A company is producing 15,000 units. At this output level, marginal revenue is $22 and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?

a. The company is making a loss
b. The company needs to cut production
c. The company needs to increase production
d. Not enough information is provided

3-1 Game Day Shuttle Service

You run a game day shuttle service for parking services for the local ball club. Your costs for different customer loads are 1: $30, 2: $32, 3: $35, 4: $38, 5: $42, 6: $48, 7: $57, and 8: $68. What are your marginal costs for each customer load level? If you are compensated $10 per ride, what customer load would you want?

3-2 Copier Company

A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers, and output increased by 100,000 pages per day. One month ago, they added five workers, and productivity also increased by 50,000 pages per day. Copiers cost about twice as much as workers. Would you recommend they hire another employee or buy another copier?

Part 4

1. Assume a firm has the following cost and revenue characteristics at its current level of output: price=$10.00, average variable cost=$8.00 and average fixed cost =$4.00. This firm is

a. incurring a loss of $2.00 per unit and should shut down.
b. realizing only a normal profit.
c. realizing an economic profit of $2.00 per unit.
d. incurring a loss per unit of $2.00, but should continue to operate in the short run.

2. What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%.

a. $10.52
b. $11.57
c. $18.18
d. $30.00

3. You expect to sell 500 cell phones a month, which have a marginal cost of $50. If your fixed costs are $5,000 per month, what is the break-even price?

a. $10
b. $50
c. $60
d. $100

4-1 Doctor's Human Capital

Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to practice medicine. Doctors are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. In Canada, the government nationalized the healthcare system and reduced doctors' compensation. Is this a form of post-investment hold-up?

4-2 Toy Trucks

Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for a plastic injection molding machine (which can be sold for $2.0 million) and $100,000 in plastic injection molds specifically for the toy (not valuable to anyone else). Labor and the cost of materials necessary to make each truck is about $3. This year, a competitor has developed a similar toy that has significantly reduced demand for the toy truck. Now, the original manufacturer is deciding whether they should continue production of the toy truck. If the estimated demand is 100,000 trucks, what is the breakeven price for the toy truck? Should you shut down?