Management Development Institute

NMP 27 Term 1
Managerial Economics- Sec A
Quiz 1

!eig"tage 1#$ Time 1%

minutes
1. For each one of the costs below, explain whether the resource cost is explicit or implicit.
Assume the owner of the business can invest money and earn 10% annually. Calculate
the explicit and implicit cost wherever applicable.
a. A computer server to run the firms networ is leased for !"000 per year which is
!1000 more than the maret rate. &'###( e)plicit costs
1
b. #he owner starts a business usin$ !%0000 of cash from a personal savin$s account.
Implicit costs( &%### 1

2. A firm is contemplating an advertising campaign that promises to yield $120 one year
from now for $100 spent now. Explain why the firm should or should not undertake the
advertising campaign. 2
Pro*ect +oul, -e un,erta.en un,er t"e con,ition 12#/011r2 341## 43 r542#$
3. he value of the firm increases with a decrease in! 1
a. total revenue.
b. the discount rate.
c. the cost of capital.
d. "one of the a#ove
$. Economic %rofit is e&ual to 1
a. 'usiness profit ( implicit cost
b. Business profit implicit cost
c. 'usiness profit ( explicit cost
d. 'usiness profit ) explicit cost
%. &hen products are diversified and new product is launched with new utility or desi$n or
'uality, the firm will en(oy profit due to 1
a. )onopoly power
-6 Innovation
c. *is undertaen
d. )ana$erial efficiency
". #he firm owns a 1+%% model Clare,-wens $arba$e incinerator, which it uses to dispose
of paper and cardboard waste. .ven thou$h this type of incinerator is now ille$al to use
for environmental reasons, the firm can continue to use it because its exempt under a
/$randfather0 clause in the law. 1owever the exemption only applies to the current owner
for use until it wears out or is replaced. #he owner offered to $ive the incinerator to the
2mithsonian 3nstitute as a charitable $ift. &hat type of cost 4explicit or implicit5 is
associated with the incinerator6 7o you thin that the 2mithsonian mana$ers should
accept the offer6 8ive reasons for your answer in the second part. 19:;<
T"ere is an implicit costs o7 using o+ner8s ,epreciation on t"e mac"ine6 Also t"ere ma9 -e
e)plicit running costs o7 capital on mac"iner96
T"e managers o7 Smit"sonian institute "a, turne, ,o+n t"e o77er6 T"is institute runs a
museum no ,ou-t( -ut gar-age incinerator cannot -e use, to -e .ept in museum6 T"e
institute itsel7 also cannot use it 7or gar-age incineration( even it is a 7ree o7 cost( t"ere
+oul, -e an a,,e, e)plicit costs o7 pa9ing penalt9 associate, +it" using it6

Management Development Institute
NMP 27 Term 1
Managerial Economics- Sec A
Quiz 1

!eig"tage 1#$ Time 1%

minutes
1. For each one of the costs below, explain whether the resource cost is explicit or implicit.
Assume the owner of the business can invest money and earn 10% annually. Calculate
the explicit and implicit cost wherever applicable.
a. Computer pro$rammers cost !<0 per hour. #he firm will hire :00000 hours of
pro$ramme services this year. & ' la."s( e)plicit costs
1
b. A buildin$ for the business was purchased three years a$o which is now worth !<0
million. Implicit costs( &: million
1
:. #he value of a firm is e'ual to= 1
a. the present value of tan$ible assets.
b. the present value of all future revenues
c6 t"e present value o7 all 7uture net cas" 7lo+s6
d. current revenues less current costs
<. #he contribution of owner,provided inputs in production is an=
a6 implicit cost6
b. economic rent.
c. economic profit.
d. explicit cost.
>. #he business profit of a firm is always lower than economic profit. #rue or ;alse6 1
%. A doctor spent two wees doin$ charity medical wor in )exico. 3n calculatin$ her
taxable income for the year, her accountant deducted as business expenses her,round trip
airline ticet, meals, and a hotel bill for the two,wee stay. 2he was surprised to learn
that the accountant, followin$ the tax rules, could not deduct as a cost of the trip the
!?000 of income she lost by bein$ absent from her medical practice for two wees. 2he
ased the accountant, /2ince lost income is not deductible as an expense, should 3 i$nore
it when 3 mae my decision next year to $o to )exico for charity wor60 Can you $ive
the doctor some advice on decision main$6 :
The income that is lost is an opportunity costs which is not considered while
calculating tax, as it is based on accounting income of the individual. Thus her tax
is not saved for this charity work. So she is losing her salary and no tax
exemption. Though for tax calculation she should not consider the income lost,
but for making decision based on her economic income this lost salary is
reuired.
". @ou are in the maret for a new refri$erator for your companys loun$e and you have
narrowed the search down to two models. #he ener$y efficient model sells for !%00 and
will save !:% at the end of each of the next five years in electricity costs. #he standard
model has features similar to efficient ener$y model but provides no savin$s in the
electricity costs. 3t is priced at !>00. Assumin$ your opportunity costs of funds is %
percent, which refri$erator should you purchase6 <
;irst mo,el actuall9 costs 4 &%## < P6= 0savings o7 &2% 7or eac" 9ear 7or 7ive
9ears2 4 appro)6 :>1
Secon, mo,el 4 &?##
T"ere7ore 7irst mo,el less costl9