Question

The following terms are used to describe various economic characteristics of costs: Opportunity Cost Average Cost Sunk Cost Out-of-pocket Cost Differential Cost Required: Choose one of the preceding terms to characterize each of the amounts described below. Each term may be used only once (5 Points). (1). The cost of merchandise inventory purchased five years ago. The goods are now obsolete. (2). The cost of feeding 300 children in a public school cafeteria is $450 per day, or $1.50 per child per day. What economic term describes this $1.50 cost? (3). The management of a high-rise office building uses 3,000 square feet of space in the building for its own administrative functions. This space could be rented for $30,000. What economic term describes this $30,000 of lost rental revenue? (4). The cost of building an automated assembly line in a factory is $700,000; a manually operated assembly line would cost $250,000. What economic term is used to describe the $450,000 variation between these two amounts? (5). Refer to the preceding question and assume that the firm is currently building the assembly line for $700,000. What economic term is used to describe the $700,000 construction cost?

Answer 1

Solution 1:

1. The cost of merchandise inventory purchased five years ago. The goods are now obsolete. = Sunk Cost

2. The cost of feeding 300 children in a public school cafeteria is $450 per day, or $1.50 per child per day. What economic term describes this $1.50 cost - Average cost

3. The management of a high-rise office building uses 3,000 square feet of space in the building for its own administrative functions. This space could be rented for $30,000. What economic term describes this $30,000 of lost rental revenue - Opportunity Cost

4. The cost of building an automated assembly line in a factory is $700,000; a manually operated assembly line would cost $250,000. What economic term is used to describe the $450,000 variation between these two amounts - Differential Cost

5. efer to the preceding question and assume that the firm is currently building the assembly line for $700,000. What economic term is used to describe the $700,000 construction cost - Out-of-pocket Cost