Multiple-Choice Questions
1. As manager of a company that is trying to maximize long-run profit, which of the following is a rational profit-maximizing business decision?
a. In the long run, shut down the business if price falls below long-run average costs.
b. In the long run, shut down the business if price falls below short-run average variable costs.
c. In the short run, shut down the business if price falls below average costs.
d. In the short run, shut down the business if price is not high enough to cover fixed costs.
2. You are considering opening a new business to sell golf clubs. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce a club. If you can sell clubs for $100 each, what is your break-even quantity?
a. 1,000
b. 3,500
c. 4,375
d. 17,500
3. You are the manager of a small production facility. Your annual fixed costs are $50,000, marginal costs are $10 per unit, and you are producing 50,000 units per year. In the short run, what is the minimum acceptable price level before it makes economic sense to shut down?
a. $9.00
b. $10.00
c. $11.00
d. $12.50
4. If production of a certain type of product requires a large specific investment, which of the following production setups would you least expect to see?
a. Short-term outsourcing
b. Vertical integration
c. Long-term relationship with external supplier
d. All production met through internal sources
5. Your new yo-yo has fixed costs of $2 per unit and marginal costs of $3 per unit, and you plan to sell the yo-yos for $9.50 each. What is the product’s contribution margin?
a. $3.00
b. $4.50
c. $6.50
d. $9.50