Question

17. Suppose a builder constructs a house that he hopes to sell to a prospective future buyer before he finishes building it. After spending six months and $300,000 in acquiring the land and constructing the house, market conditions change and the builder fails to find a buyer willing to pay his asking price of $360,000. The builder further realizes that by investing $300,000 in a bank deposit he would have been able to earn $4,500 as interest. Which of the following is the economically efficient way for the builder to view his investment? a. The $300,000 is a sunk cost and should be ignored when negotiating a price for the home. b. The $300.000 is the builder's opportunity cost and he should not accept any offer below that. c. He should advertise more heavily in an attempt to sell the home for at least $300,000 d. He should raise the price even further to better reflect the additional opportunity costs of his time and capital expenditures. 18. Ben decides to expand his ice cream store so he can begin selling sub sandwiches. He spends S20,000 in preparing his new sandwich shop. His marginal cost of selling sub sandwiches is $3 and he estimates that he can sell 10,000 subs for $6 each. He soon learns of a nearby store that is now selling identical subs for $3.50 each. Ben should: *. quit selling subs since his average total cost of selling subs is greater than the $3.50 price he would now have to charge. b. sell subs for $3.50 each, considering the $20,000 to be a sunk cost and ignoring it. subs as long the price he receives exceeds his average fixed costs of selling subs d. lower his price to $5 to cover his average total cost of selling subs. 19. The monetary cost of the space a restaurant rents to produce meals can be categorized as a a variable cost b. marginal cost. fixed cost d opportunity cost 20. Total fixed cost is the same regardless of: a. how many new machines a firm purchases b. how many facilities a firm shuts down. c. how much new capital a firm rents. d. how much output the firm produces

Answer 1

The answer to question 17 is Option A:

   The $300,000 is a sunk cost and should be ignored when negotiating a price for the home.

A sunk cost is the cost that has already been incurred and cannot be recovered. Considering the situation of the builder. He should ignore the $300,000 and try to make a deal of it.

The answer to question 18 is Option B:

Sell subs for $3.50 each, considering the $20,000 to be a sunk cost and ignoring it.

Since there's a competition for Ben with a price of $3.50, he should lower his price and focus to get the maximum with the new cost. The $20,000 could be considered as a sunk cost and ignore it.

The answer to question 19 is Option C:

Fixed Cost.

The rent paid for space will be added to the fixed costs.

The answer to question 20 is Option D:

   how much output the firm produces.

As per the definition of Fixed Cost, it is the expenses that do not change as a function of the activity of a business. It has no dependency on the output a firm produces.