MBA 701 EXAM QUESTIONS WITH 100%
CORRECT ANSWERS
Which of the following is an implicit cost to a firm that produces a good or service? -
ANSWER Foregone interest of using money that could have been kept in a bank.
Jacqui decides to open her own business and earns $50,000 in accounting profit the
first year. When deciding to open her own business, she turned down three separate job
offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic
profit from running her own business? [Economic Profit = Total revenue - Total costs
(including explicit and implicit costs)]. - ANSWER economic profit = 50,000 (the
accounting profit, which is revenue - explicit cost) - 45,000 (the implicit cost) = $5,000.
Incentive plans imply ____. - ANSWER if managers put forth little effort, they receive little
pay; if they put forth much effort and hence generate many sales and more profit, they
receive a lot of pay.
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 ____. [For a
stream of future values: PV = FV1/(1+i)1 + FV2/(1+i)2 + ... + FVn/(1+i)n]. - ANSWER So, PV
= 1,000/(1.10)1 + 2,000/(1.10)2 = $2,561.98.
If the annual interest rate is 0 percent, the present value of receiving $210 in the next
year is ____. [PV = FV/(1+i)n]. - ANSWER PV = FV/(1+i)n. PV = 210/(1.00)1. You see in this
example that the opportunity cost of waiting (OCW), which is the foregone interest, is
zero (since the interest rate is zero).
A farm must decide whether or not to purchase a new tractor. The tractor will reduce
costs by $2,000 in the first year, $2,500 in the second, and $3,000 in the third and final
year of usefulness. The tractor costs $9,000 today, while the above cost savings will be
realized at the end of each year. If the interest rate is 7 percent, what is the net present
value of purchasing the tractor? [N(Q) = B(Q) - C(Q)]. - ANSWER So, the net present
value of the tractor = the present value of the benefits (saved costs) - the costs (incurred
today, and that it is also in present value) = 2,000/(1.07)1 + 2,500/(1.07)2 + 3,000/(1.07)3-
9,000 = -$2,498.35.
If marginal costs of producing an additional unit for a firm exceed marginal benefits,
then ____. - ANSWER the firm should decrease its production level.
In order to maximize net benefits, the managerial control variable should be used up to
the point where ____. - ANSWER net marginal benefits equal zero.
"Our marginal revenue is greater than our marginal cost at the current production
level." This statement indicates that the firm ____. - ANSWER should increase the
, quantity produced to increase profits
Control Variable
Total Benefits
Total Costs
Net Benefits
Marginal Benefit
Marginal Cost
Marginal Net Benefit
Q
B(Q)
C(Q)
N(Q)
MB(Q)
MC(Q)
MNB(Q)
0
0
0
0
-
-
-
1
900
100
800
900
CORRECT ANSWERS
Which of the following is an implicit cost to a firm that produces a good or service? -
ANSWER Foregone interest of using money that could have been kept in a bank.
Jacqui decides to open her own business and earns $50,000 in accounting profit the
first year. When deciding to open her own business, she turned down three separate job
offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic
profit from running her own business? [Economic Profit = Total revenue - Total costs
(including explicit and implicit costs)]. - ANSWER economic profit = 50,000 (the
accounting profit, which is revenue - explicit cost) - 45,000 (the implicit cost) = $5,000.
Incentive plans imply ____. - ANSWER if managers put forth little effort, they receive little
pay; if they put forth much effort and hence generate many sales and more profit, they
receive a lot of pay.
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 ____. [For a
stream of future values: PV = FV1/(1+i)1 + FV2/(1+i)2 + ... + FVn/(1+i)n]. - ANSWER So, PV
= 1,000/(1.10)1 + 2,000/(1.10)2 = $2,561.98.
If the annual interest rate is 0 percent, the present value of receiving $210 in the next
year is ____. [PV = FV/(1+i)n]. - ANSWER PV = FV/(1+i)n. PV = 210/(1.00)1. You see in this
example that the opportunity cost of waiting (OCW), which is the foregone interest, is
zero (since the interest rate is zero).
A farm must decide whether or not to purchase a new tractor. The tractor will reduce
costs by $2,000 in the first year, $2,500 in the second, and $3,000 in the third and final
year of usefulness. The tractor costs $9,000 today, while the above cost savings will be
realized at the end of each year. If the interest rate is 7 percent, what is the net present
value of purchasing the tractor? [N(Q) = B(Q) - C(Q)]. - ANSWER So, the net present
value of the tractor = the present value of the benefits (saved costs) - the costs (incurred
today, and that it is also in present value) = 2,000/(1.07)1 + 2,500/(1.07)2 + 3,000/(1.07)3-
9,000 = -$2,498.35.
If marginal costs of producing an additional unit for a firm exceed marginal benefits,
then ____. - ANSWER the firm should decrease its production level.
In order to maximize net benefits, the managerial control variable should be used up to
the point where ____. - ANSWER net marginal benefits equal zero.
"Our marginal revenue is greater than our marginal cost at the current production
level." This statement indicates that the firm ____. - ANSWER should increase the
, quantity produced to increase profits
Control Variable
Total Benefits
Total Costs
Net Benefits
Marginal Benefit
Marginal Cost
Marginal Net Benefit
Q
B(Q)
C(Q)
N(Q)
MB(Q)
MC(Q)
MNB(Q)
0
0
0
0
-
-
-
1
900
100
800
900
