Question

1. Carlos plans to start a new dry cleaning business. For that he purchased a space which costed him $100,000. For that he withdrew his savings worth $50,000 and borrowed the remaining $50,000 from a bank. His savings was earning him 3% interest per annum and the banks charges him 6% interest per annum. Based on this what would be Carlos opportunity cost of purchasing the space?

	a.	$3,000
	b.	$1,500
	c.	$3,000
	d.	$4,500

2. Which of the following statements is correct?

	a.	The total variable cost of seven units equals the average variable cost of seven units times seven.
	b.	The marginal cost of the fifth unit of output equals the total cost of five units minus the total cost of four units.
	c.	The marginal cost of the fifth unit of output equals the total variable cost of five units minus the total variable cost of four units.
	d.	All the other options are correct.

3. For a firm the Marginal Cost of producing 60th unit is $3.90 and the Average Total Cost of producing 59 units is $3.30. This would mean that

	a.	average variable costs must be falling.
	b.	average total costs are rising at 60 units.
	c.	average total costs are falling at 60 units.
	d.	total costs are falling at 60 units.

4. Brandon starts a new business for which he got loan from bank worth $200,000 charging him interest 6% per annum. Further he also used his savings worth $100,000 on which he was earning an interest of 2% per annum. Based on this information, Brandon explicit cost of capital would be

	a.	$4,000.
	b.	$6,000.
	c.	$4,000.
	d.	$12,000.

5. Sunny sells lemonade for $0.50 per cup. In a day he sold 300 cups. His total revenue for the day would be

	a.	$150.
	b.	$300.
	c.	$350.
	d.	$600.

Answer 1

1. Based on this what would be Carlos opportunity cost of purchasing the space?

Answer – b. $1,500

Opportunity cost is also called as the implicit cost. It is the cost of his own investment. To purchase a space he used his own money (not money borrowed) of $50,000. On this he used to get interest of 3%. If the money not used for purchase he suppose to get interest of $1,500 (3% of 50,000). This the opportunity cost.

2. Which of the following statements is correct?

Answer – d. All the other options are correct.

a. The total variable cost of seven units equals the average variable cost of seven units times seven.

TVC = No. of units * Average Variable cost

b. The marginal cost of the fifth unit of output equals the total cost of five units minus the total cost of four units.

MC = TC n – TC n-1

c. The marginal cost of the fifth unit of output equals the total variable cost of five units minus the total variable cost of four units.

MC = TVC at n – TVC n-1. This formula also used because fixed cost remains constant at all level of output.

3. For a firm the Marginal Cost of producing 60th unit is $3.90 and the Average Total Cost of producing 59 units is $3.30. This would mean that      

Answer – b. average total costs are rising at 60 units.

At 59 units, ATC = $3.30. The TC = 59*$3.30 = $194.7

At 60 units, MC = $3.9. TC = ∑MC. So TC at 60 units = $194.7+$3.90 = $198.6, ATC = $198.6/60 = 3.31

The Total cost is increasing and the ATC is also increasing at 60 units.

4. Brandon starts a new business for which he got loan from bank worth $200,000 charging him interest 6% per annum. Further he also used his savings worth $100,000 on which he was earning an interest of 2% per annum. Based on this information, Brandon explicit cost of capital would be

Answer – d. $12,000

The interest that is paid on the bank loan will be considered as the explicit cost. It is paid to the outsiders and can be recorded in the books of accounts. However, the interest paid on his own savings is called as the implicit cost.

5. Sunny sells lemonade for $0.50 per cup. In a day he sold 300 cups. His total revenue for the day would be

Answer –a. $150

TR = Price * Quantity sold

TR = $0.50*300 = $150