1. You are a fleet manager for a metro-area company. You've recently discovered that ten of your company's vehicles require repairs which will cost an estimated $2,000 each. In considering whether to repair or replace your vehicles, your college roommate suddenly calls one day. After relaying your predicament, your roommate tells you that you need to consider all of the past repairs that those vehicles have cost the company, and pushes you to lean in favor of repair rather than replace. How would you assess your roommate's advice?
Select one:
a. The existence of past repairs is a sunk cost that does not affect the current cost-benefit decision, and so the cost of past repairs is irrelevant to your present decision whether to repair or replace.
b. Whenever the value of the repair exceeds the replacement cost, it is preferable to disinvest from the asset entirely. The appropriate choice is to neither repair nor replace, but to sell the vehicles as-is.
c. Past repairs represent an investment in an asset; your roommate is correct that recouping the value of the investment necessitates keeping the vehicles and repairing them, rather than replacing them.
d. Past repairs increase the current value of the vehicle, and so the cost of those past repairs should be considered a benefit that may partially or completely offset the cost of the repairs that are now required.
You have collected the following data on output and total variable costs:
Q TVC($)
1 60
2 107
3 145
4 178
5 213
6 253
7 304
8 370
9 455
10 566
2. Over what range of output does this firm exhibit increasing returns (increasing MP), and diminishing returns (decreasing MP)?
Select one:
a. Increasing returns for output levels at 6 and lower, and decreasing returns for output levels at 7 and higher.
b. Increasing returns for output levels at 4 and lower, and decreasing returns for output levels at 5 and higher.
c. Marginal costs are less than fixed costs up to Q = 8, so increasing returns is experienced until Q =8 and then decreasing returns from Q = 9 and higher.
d. Increasing returns for output levels at 6 and higher, and decreasing returns for output levels at 5
3.Current fixed costs for the company equal $75. Draw two graphs, both with Qon the horizontal axis: one graph shows TVCand TC, and the other shows AVC, AC, and MC. Suppose that the government imposes a $15 property tax hike on all businesses; how will that affect your two graphs; i.e., which cost curves will be affected and how?Select one:
a. TC and AC will both shift up by $15Q (i.e., $15 divided by Q).
b. The property tax will shift up TC by $15 and ACby $15Q (i.e., $15 divided by Q). c. TC will shift up by $15 while AC and MC will shift down by $15Q (i.e., $15 divided by Q). d.MC will shift up by the amount of the tax (i.e., by $15)
4. Suppose instead that the government considers your production process to be polluting, and imposes a $4 tax per unit produced. How does this tax increase compare to the property tax increase, in terms of the effect on your company's cost curves?
Select one:
a. The per-unit tax will affect fixed costs, so it will shift up TCand AC, but not the TVC, AVC, or MC curves.
b. Since the per-unit tax reduces profitability, it will shift all of the curves downward by $4×Q(i.e., $4 times Q).
c. The per-unit tax will only affect and shift up the marginal and average cost curves; the others will remain where they are.
d. A per-unit tax will shift up all the curves (TC, TVC, AVC, AC, and MC)
5. Your boss says "either of these taxes is going to force us to change our production levels." Given what you know about optimization analysis, how would you respond?
Select one:
a. Since neither tax is a true "cost" of production (they are unlike paying salaries or buying raw materials), then it is impossible to say whether the optimal Qis affected.
b. Since both taxes alter the cost curves (in different ways), they both necessarily alter the optimal Q for the company.
c. Optimization depends partly on marginal cost but also on marginal benefit. The property tax does not affect MCbut does affect MB, so it could change the optimal Q. The per-unit tax affects MC and MB equally, so it would not change the optimal Q.
d. Optimization depends partly on marginal cost, which is not affected by the property tax, though it is by the per-unit tax. The property tax won't change the optimal Q but the per-unit tax may change the optimal Q