Chapter 1.
If the interest rate is 10 percent and cash flows are $1,000 at the end of year one and $2,000
at the end of year two, then the present value of these cash flows is:
a) $2,562.
b) $3,200.
c) $439.
d) $3,000.
Accounting profits are:
a) total revenue minus total cost.
b) total cost minus total revenue.
c) marginal revenue minus total cost.
d) total revenue minus marginal cost.
The opportunity cost of receiving $10 in the future as opposed to getting that $10 today is:
a) the foregone interest that could be earned if you had the money today.
b) the taxes paid on any earnings.
c) the value of $10 relative to the total income of that person.
d) the value of $10 relative to the total income of all persons.
At what level of output does marginal cost equal marginal revenue?
No. units Total Total
produced Revenue costs
0 0 0
1 100 50
2 180 110
3 250 180
4 290 270
5 310 380
a) 1
b) 2
c) 3
d) 4
Suppose total benefits and total costs are given by B(Y) = 100Y − 8Y2 and C(Y) = 10Y2.
Then marginal benefits are:
a) 100 − 16Y.
b) 100Y − 8Y2.
c) 50 − 4Y.
d) 200Y − 10Y.
Economics:
a) exists because of scarcity.
b) is not related to decision making.
c) is the science of the rich.
d) has nothing to do with the allocation of resources.
The higher the interest rate, the greater the:
a) present value.
b) net present value.
c) Both present value and net present value are correct.
d) Neither present value nor net present value is correct.
When MB = 300 − 12Y and TC = 12Y + 108, the optimal level of Y is:
a) 25.
b) 4.5.
c) 8.
d) 24
Suppose the growth rate of the firm's profit is 5 percent, the interest rate is 6 percent, and the
current profits of the firm are $80 million. What is the value of the firm?
a) $89.2 million
b) $1,413.3 million
c) $8,480 million
d) None of the statements associated with this question are correct.
If you put $700 in a savings account at an interest rate of 3 percent, how much money will
you have in one year?
a) $370
b) $679.61
c) $703.00
d) $721
Net benefits in the table:
Control Total Total Net Marginal Marginal Marginal
variable Benefits Costs Benefits Benefit Cost Net Benefit
Q B(Q) C(Q) N(Q) MB(Q) MC(Q) MNB(Q)
0 0 0 0 - - -
1 900 100 800 900 100 800
2 1,700 300 C 800 200 600
3 2,400 600 1,800 700 E 400
4 A 1,000 2,000 600 400 200
5 3,500 1,500 2,000 500 500 F
6 3,900 2,100 1,800 D 600 -200
7 4,200 2,800 1,400 300 700 -400
8 4,400 B 800 200 800 -600
9 4,500 4,500 0 100 900 -800
10 4,500 5,500 -1,000 0 1,000 -1,000
a) initially increase, reach a maximum, and then decrease.
b) initially decrease, reach a minimum, and then increase.
c) remain relatively stable over different values for the control variable.
d) initially remain relatively stable and then decrease.
What is the marginal revenue of producing the fortieth unit?
No. units Total Total
produced Revenue Costs
0 0 0
10 120 40
20 200 100
30 270 170
40 310 260
50 330 370
a) 4
b) 80
c) 7.75
d) 40
Suppose the growth rate of the firm's profit is 4 percent, the interest rate is 5 percent, and the
current profits of the firm are $75 million. What is the value of the firm?
a) $2,111.5 million
b) $7,766.6 million
c) $10,600 million
d) None of the statements associated with this question are correct.
Which of the following is an implicit cost to a firm that produces a good or service?
a) Labor costs
b) Costs of operating production machinery
c) Foregone profits of producing a different good or service
d) Costs of renting or buying land for a production site
When dealing with present value, a higher interest rate:
a) does not affect the present value of the future amount.
b) increases the present value of a future amount.
c) decreases the present value of a future amount.
d) None of the statements associated with this question are correct.
What is the marginal net benefit of producing the fourth unit?
No. units Total Total
produced Revenue costs
0 0 0
1 100 50
2 180 110
3 250 180
4 290 270
5 310 380
a) -50
b) 0
c) 60
d) 40
Suppose total benefits and total costs are given by B(Y) = 100Y − 8Y2 and C(Y) = 10Y2.
What level of Y will yield the maximum net benefits?
a) 75/36
b) 75/18
c) 50/18
d) 100/36
Basic principles that comprise good management include:
a) identifying goals and constraints.
b) recognizing the nature and importance of profits.
c) understanding incentives.
d) All of the statements associated with this question are correct.
The value of the firm is the:
a) current value of profits.
b) present discounted value of all future profits.
c) average value of all future profits.
d) total value of all future profits.
Which of the following is NOT a source of rivalry in economic transactions?
a) Consumer−producer rivalry
b) Producer−producer rivalry
c) Government−producer rivalry
d) All of the statements associated with this question are correct.
Maximizing the present value of all future profits is the same as maximizing current profits if
the growth rate in profits is:
a) greater than the interest rate.
b) less than the interest rate.
c) equal to the interest rate.
d) not constant over time.
Maximizing the lifetime value of the firm is equivalent to maximizing the firm's current
profits if the:
a) interest rate is larger than the growth rate in profits and both are constant.
b) growth rate in profits is constant and is larger than the interest rate.
c) interest rate is smaller than the growth rate of profits.
d) growth rate of profits and the interest rate are equal.
What is the marginal benefit associated with producing six units of the control variable, Q
(identify point D in the table)?
Control Total Total Net Marginal Marginal Marginal Net
variable Benefits Costs Benefits Benefit Cost Benefit
Q B(Q) C(Q) N(Q) MB(Q) MC(Q) MNB(Q)
0 0 0 0 - - -
1 900 100 800 900 100 800
2 1,700 300 C 800 200 600
3 2,400 600 1,800 700 E 400
4 A 1,000 2,000 600 400 200
5 3,500 1,500 2,000 500 500 F
6 3,900 2,100 1,800 D 600 -200
7 4,200 2,800 1,400 300 700 -400
8 4,400 B 800 200 800 -600
9 4,500 4,500 0 100 900 -800
10 4,500 5,500 -1,000 0 1,000 -1,000
a) 600
b) 400
c) 200
d) 100
The first-order condition for maximizing net benefits is:
a) dB/dQ = 0.
b) dN/dQ = 0.
c) d2N/dQ2 = 0.
d) dC/dQ = 0.
At what level of output does marginal cost equal marginal revenue?
No. units Total Total
produced Revenue Costs
0 0 0
10 120 40
20 200 100
30 270 170
40 310 260
50 330 370
a) 10
b) 20
c) 30
d) 40
When MB = 171 − 8Y and TC = 5Y2 + 108, the optimal level of Y is:
a) 25.
b) 9.5.
c) 8.
d) 24.
