Chapter 4: Costs and Cost Minimization

Multiple Choice

1. Suppose you are a star basketball player at a major university in your sophomore year. You are sought after by several NBA teams. Which of the following choices best characterizes your opportunity cost if you choose to drop out of college and enter the NBA? a) The value of your college scholarship that you have given up. b) The skills that two more years of playing at your college would have given you along with their additional value over the rest of your life, in addition to the educational value of the college degree. c) The total of explicit costs that have been incurred in the past. d) The total of implicit costs that have been incurred in the past.

Ans: B

2. You have invested about $100,000 in a new (hopefully) trendy restaurant in an urban location. These costs have gone to purchase the restaurant, prepay insurance for the following year and purchase supplies for the restaurant. It will cost you an additional $10,000 per year to hire each waiter and waitress. (They earn tips which they get to keep.) Which of the following statements is most accurate? a) The $100,000 sum represents sunk costs, whereas the costs for waiters and waitresses is not sunk, but all of these costs would be considered accounting costs, but do not include all of the possible economic costs of operating the business. b) The $100,000 sum represents sunk costs, whereas the costs for waiters and waitresses is not sunk, but all of these costs would be considered accounting costs, and also include all of the possible economic costs of operating the business c) The $100,000 sum represents sunk costs and the costs for waiters and waitresses are sunk as well. d) The $100,000 sum represents sunk costs and all of the possible accounting costs as well.