MDI Gurgaon

NMP-Energy Term 1
Microeconomics
Quiz 1
Weightage 5% Time 15 minutes
Marks: 10
______________________________________________________________________________

1. Which of the following is an implicit cost?

a. Insurance payments
b. Property taxes
c. Interest payments on a loan
d. None of the above is an implicit cost

2. The value of the firm decreases with a decrease in:

a. total revenue
b. the discount rate.
c. total cost.
d. None of the above

3. If P = $1,000 - $4Q:
a. MR = $1,000 - $4Q
b. MR = $1,000 - $8Q (First find out TR=PQ and then MR by differentiating TR by Q)
c. MR = $1,000Q - $4
d. MR = $250 - $0.25P

4. For each one of the costs below, explain whether the resource cost is explicit or
implicit, and give the value for each one. Assume the owner of the business can
invest money and earn 10% annually. (One each)

a. A building for the business was purchased for $18 million three years ago but is now
worth $30 million. Implicit cost, 10% of $30million = $3million
b. Computer programmers cost $30 per hour. The firm will hire 200000 hours of
programme services this year Explicit cost 30*200000 =$6 million

5. Monica quit her $50,000 per year job, purchased a building that was previously rented by
the operator of a candy store for $1,500 per month, and used the space to breed and sell
tropical fish. In her first year she made a business profit of $60,000. What was her
economic profit?
a. Her economic profit was the same as her business profit.
b. $42,000
c. $10,000
d. She had an economic loss of $8,000 (60000-50000-1500*12)

6. State true or False:

a. A firm exists in an economy for taking up large scale production that reduces transaction
costs True
b. Principal-Agent theory in Economics explains relationship between buyers and sellers in
the market. False

7. A doctor spent two weeks doing charity medical work in Mexico. In calculating her
taxable income for the year, her accountant deducted as business expenses her-round trip
airline ticket, meals, and a hotel bill for the two-week stay. She was surprised to learn that
the accountant, following the tax rules, could not deduct as a cost of the trip the $8000 of
income she lost by being absent from her medical practice for two weeks. She asked the
accountant, Since lost income is not deductible as an expense, should I ignore it when I
make my decision next year to go to Mexico for charity work?
Can you give the doctor some advice on decision making?
For tax purpose business profit is seen, but when it comes to decision making
to understand the actual viability of business or how much actual costs is being
incurred for charity we calculate economic profit.
2

MDI Gurgaon
NMP-Energy Term 1
 Microeconomics
Quiz 1
Weightage 5% Time 15 minutes
Marks: 10
_______________________________________________________________________________

1. Separation of ownership & management is most common

a. In vigorously competitive markets
b. When shareholders are poorly informed.
c. When managers own a significant ownership interest
d. None of the above

2. The slope of a tangent at a point on the total profit curve indicates:

a. marginal profit at that point.
b. an inflexion point.
c. average profit at that point.
d. total profit at that point.

3. Business profits in a business is Rs 20 million, the owner would have earned Rs20 lakh
per annum in corporate sector and he has capital asset worth Rs 40 million. If the
discount rate is 10%, then economic profit equals:
a. Zero
b. 14million (20-2-10%*40)million
c. 16 million
d. 17million

4. For each one of the costs below, explain whether the resource cost is explicit or implicit,
and give the value for each one. Assume the owner of the business can invest money and
earn 10% annually. (One each)
a. A computer server to run the firms network is leased for $6000 per year which is $1000
more than the market rate. Explicit $6000
b. The owner starts a business using $50000 of cash from a personal savings account.
Implicit 10%*50000=5000

5. The value of a firm is equal to:

a. the present value of tangible assets.
b. the present value of all future revenues
c. the present value of all future net cash flows.
d. current revenues less current costs.

6. State True or False

a. There exists a trade off between equity and efficiency if increasing productivity per
worker leads to reduction of labour employment. True

b. The second order condition of Profit maximization is slope of MR must be greater than
slope of MC. False

7. You are in the market for a new refrigerator for your companys lounge and you have
narrowed the search down to two models. The energy efficient model sells for $500 and
will save $25 at the end of each of the next five years in electricity costs. The standard
model has features similar to efficient energy model but provides no savings in the
electricity costs. It is priced at $400. Assuming your opportunity costs of funds is 5
percent, which refrigerator should you purchase? First model
2

The actual price of the 1st model is $500 - t=1-525/(1+0.05)t = 398 < 400.